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Bulletin No. 2006-2May 30, 200

HIGHLIGHTS

OF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2006–28, page 938.LIFO; price indexes; department stores. The March 2006Bureau of Labor Statistics price indexes are accepted for useby department stores employing the retail inventory and last-in,first-out inventory methods for valuing inventories for tax years

ended on, or with reference to, March 31, 2006.

Rev. Proc. 2006–24, page 943.This procedure informs the trustee (or debtor in possession)representing the bankruptcy estate of the debtor of the proce-dure to be followed in obtaining a prompt determination by theService of any unpaid tax liability of the estate incurred duringthe administration of the case. Rev. Proc. 81–17 obsoleted.

EMPLOYEE PLANS

Notice 2006–49, page 943. Weighted average interest rate update; 30-year Trea-sury securities. The weighted average interest rate for May2006 and the resulting permissible range of interest rates usedto calculate current liability and to determine the required con-tribution are set forth.

Rev. Proc. 2006–27, page 945. Administrative programs; correction programs. This pro-cedure updates and expands upon the Service’s comprehen-sive Employee Plans Compliance Resolution System (EPCRS)of correction programs for retirement plans within the jurisdic-tion of the Commissioner, Tax Exempt and Government EntitiesDivision. Rev. Proc. 2003–44 modified and superseded.

ESTATE TAX

Rev. Rul. 2006–26, page 939.IRA, marital deduction. This ruling clarifies circumstancunder which the surviving spouse is considered to have a quifying income interest for life in an IRA where a marital trustdesignated as the IRA beneficiary for purposes of electing

have the IRA treated as qualifying terminable interest propeunder section 2056(b)(7) of the Code. Rev. Rul. 2000–2 moified and superseded.

EMPLOYMENT TAX

Rev. Proc. 2006–24, page 943.This procedure informs the trustee (or debtor in possessiorepresenting the bankruptcy estate of the debtor of the procdure to be followed in obtaining a prompt determination by tService of any unpaid tax liability of the estate incurred durithe administration of the case. Rev. Proc. 81–17 obsoleted

EXCISE T AX

Rev. Proc. 2006–24, page 943.This procedure informs the trustee (or debtor in possessiorepresenting the bankruptcy estate of the debtor of the procdure to be followed in obtaining a prompt determination by tService of any unpaid tax liability of the estate incurred durithe administration of the case. Rev. Proc. 81–17 obsoleted

(Continued on the next pag

Finding Lists begin on page ii.

Index for January through May begins on page vi.



ADMINISTRATIVE

Rev. Proc. 2006–24, page 943.This procedure informs the trustee (or debtor in possession)representing the bankruptcy estate of the debtor of the proce-dure to be followed in obtaining a prompt determination by theService of any unpaid tax liability of the estate incurred duringthe administration of the case. Rev. Proc. 81–17 obsoleted.

May 30, 2006 2006–22 I.R.B.



The IRS Mission

Provide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-

stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considereand Service personnel and others concerned are cautionagainst reaching the same conclusions in other cases unlethe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: SubpartTax Conventions and Other Related Items, and Subpart B, Leislation and Related Committee Reports.

Part III.—Administrative, Procedural, and MiscellaneouTo the extent practicable, pertinent cross references to thesubjects are contained in the other Parts and Subparts. Alincluded in this part are Bank Secrecy Act Administrative Rings. Bank Secrecy Act Administrative Rulings are issued the Department of the Treasury’s Office of the Assistant Se

retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indfor the matters published during the preceding months. Themonthly indexes are cumulated on a semiannual basis, and apublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropria

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2006–22 I.R.B. May 30, 200



DRAFTING INFORMATION

The principal author of this revenue

ruling is Michael Burkom of the Office

of Associate Chief Counsel (Income Tax

and Accounting). For further informa-

tion regarding this revenue ruling, contact

Mr. Burkom at (202) 622–7924 (not a

toll-free call).

Section 2056.—Bequests,etc., to Surviving Spouse

26 CFR 20.2056(a)–1: Qualified terminable interest

property elections.

Ifa maritaltrustis thenamedbeneficiaryof a dece-

dent’s IRA, under what circumstances is the surviv-

ingspouse considered to have a qualifyingincome in-

terest for life in the IRA and in the trust for purposes

of an election to treat both the IRA and the trust as

qualified terminable interest property under section

2056(b)(7)? See Rev. Rul. 2006-26, page 939.

IRA, marital deduction. This ruling

clarifies circumstances under which the

surviving spouse is considered to have a

qualifying income interest for life in an

IRA where a marital trust is designated as

the IRA beneficiary for purposes of elect-

ing to have the IRA treated as qualifying

terminable interest property under section

2056(b)(7) of the Code. Rev. Rul. 2000–2

modified and superseded.

Rev. Rul. 2006–26

ISSUE

If a marital trust described in Situa-

tions 1, 2, or 3 is the named beneficiary

of a decedent’s individual retirement ac-

count (IRA) or other qualified retirement

plan described in section 4974(c) that is a

defined contribution plan, under what cir-

cumstances is the surviving spouse con-

sidered to have a qualifying income inter-

est for life in the IRA (or qualified retire-

ment plan) and in the trust for purposes of

an election to treat both the IRA and the

trust as qualified terminable interest prop-

erty (QTIP) under § 2056(b)(7) of the In-

ternal Revenue Code?

FACTS

A dies in 2004, at age 68, survived by

spouse, B. Prior to death, A established an

IRA described in § 408(a). A’s will creates

a testamentary marital trust (Trust) that is

funded with assets in A’s probate estate.

As of A’s death, Trust is irrevocable and

is valid under applicable local law. Prior

to death, A named Trust as the beneficiary

of all amounts payable from the IRA after

A’s death. The IRA is properly included in

A’s gross estate for federal estate tax pur-

poses. The IRA is currently invested in

productive assets and B has the right (di-

rectly or through the trustee of Trust) to

compel the investment of the IRA in assets

productive of a reasonable income. The

IRA document does not prohibit the with-

drawal from the IRA of amounts in excess

of the annual required minimum distribu-

tion amount under § 408(a)(6). The execu-

tor of A’s estate elects under § 2056(b)(7)

to treat both the IRA and Trust as QTIP.

Under Trust’s terms, all income is

payable annually to B for B’s life, and noperson has the power to appoint any part

of the Trust principal to any person other

than B during B’s lifetime. B has the right

to compel the trustee to invest the Trust

principal in assets productive of a rea-

sonable income. On B’s death, the Trust

principal is to be distributed to A’s chil-

dren, who are younger than B. Under the

trust instrument, no person other than B

and A’s children has a beneficial interest in

Trust (including any contingent beneficial

interest). Further, as in Rev. Rul. 2000–2,

2000–1 C.B. 305, under Trust’s terms, Bhas the power, exercisable annually, to

compel the trustee to withdraw from the

IRA an amount equal to all the income of

the IRA for the year and to distribute that

income to B. If B exercises this power, the

trustee is obligated under Trust’s terms to

withdraw the greater of all of the income of

the IRA or the annual required minimum

distribution amount under § 408(a)(6), and

distribute currently to B at least the income

of the IRA. The Trust instrument provides

that any excess of the required minimum

distribution amount over the income of theIRA for that year is to be added to Trust’s

principal. If B does not exercise the power

to compel a withdrawal from the IRA for a

particular year, the trustee must withdraw

from the IRA only the required minimum

distribution amount under § 408(a)(6) for

that year.

The trustee of Trust provides to the

IRA trustee a copy of A’s will (Trust’s

governing instrument) before October

31, 2005, in accordance with A–6(b) of

§ 1.401(a)(9)–4 of the Income Tax regu-

lations. Because the requirements of A–4

and A–5 of § 1.401(a)(9)–4 of the Income

Tax regulations are satisfied and there are

no beneficiaries or potential beneficiaries

that are not individuals, the beneficiaries

of the trust may be treated as designated

beneficiaries of the IRA. In accordance

with § 408(a)(6) and the terms of the IRA

instrument, the trustee of Trust elects to

receive annual required minimum distri-

butions using the exception to the five

year rule in § 401(a)(9)(B)(iii) for distri-

butions over a distribution period equal to

a designated beneficiary’s life expectancy.

Because amounts may be accumulated in

Trust for the benefit of A’s children, B

is not treated as the sole beneficiary and,

thus, the special rule for a surviving spouse

in § 401(a)(9)(B)(iv) is not applicable.

Accordingly, the trustee of Trust elects tohave the annual required minimum dis-

tributions from the IRA to Trust begin in

2005, the year immediately following the

year of A’s death. The amount of the an-

nual required minimum distribution from

the IRA for each year is calculated by

dividing the account balance of the IRA as

of December 31 of the immediately pre-

ceding year by the remaining distribution

period. Because B’s life expectancy is the

shortest of all of the potential beneficiaries

of Trust’s interest in the IRA (including

remainder beneficiaries), the distributionperiod for purposes of § 401(a)(9)(B)(iii)

is B’s life expectancy, based on the Sin-

gle Life Table in A–1 of § 1.401(a)(9)–9,

using B’s age as of B’s birthday in 2005,

reduced by one for each calendar year that

elapses after 2005. On B’s death, the re-

quired minimum distributions with respect

to any undistributed balance of the IRA

will continue to be calculated in the same

manner and be distributed to Trust over

the remaining distribution period.

Situation 1—Authorized Adjustments

Between Income and Principal. The factsand the terms of Trust are as described

above. Trust is governed by the laws of

State X . State X has adopted a version of

the Uniform Principal and Income Act

(UPIA) including a provision similar to

section 104(a) of the UPIA providing that,

in certain circumstances, the trustee is

authorized to make adjustments between

income and principal to fulfill the trustee’s

duty of impartiality between the income

May 30, 2006 939 2006–22 I.R.B.



and remainder beneficiaries. More specif-

ically, State X has adopted a provision

providing that adjustments between in-

come and principal may be made, as under

section 104(a) of the UPIA, when trust

assets are invested under State X’s pru-

dent investor standard, the amount to be

distributed to a beneficiary is described

by reference to the trust’s income, and the

trust cannot be administered impartially

after applying State X’s statutory rules

regarding the allocation of receipts and

disbursements to income and principal. In

addition, State X ’s statute incorporates a

provision similar to section 409(c) of the

UPIA providing that, when a payment is

made from an IRA to a trust: (i) if no part

of the payment is characterized as interest,

a dividend, or an equivalent payment, and

all or part of the payment is required to

be distributed currently to the beneficiary,

the trustee must allocate 10 percent of therequired payment to income and the bal-

ance to principal; and (ii) if no part of the

payment made is required to be distributed

from the trust or if the payment received

by the trust is the entire amount to which

the trustee is contractually entitled, the

trustee must allocate the entire payment

to principal. State X ’s statute further pro-

vides that, similar to section 409(d) of the

UPIA, if in order to obtain an estate tax

marital deduction for a trust a trustee must

allocate more of a payment to income, the

trustee is required to allocate to incomethe additional amount necessary to obtain

the marital deduction.

For each calendar year, the trustee

determines the total return of the assets

held directly in Trust, exclusive of the

IRA, and then determines the respective

portion of the total return that is to be

allocated to principal and to income un-

der State X ’s version of section 104(a)

of the UPIA in a manner that fulfills the

trustee’s duty of impartiality between the

income and remainder beneficiaries. The

amount allocated to income is distributedto B as income beneficiary of Trust, in

accordance with the terms of the Trust

instrument. Similarly, for each calendar

year the trustee of Trust determines the

total return of the assets held in the IRA

and then determines the respective portion

of the total return that would be allocated

to principal and to income under State X ’s

version of section 104(a) of the UPIA in

a manner that fulfills a fiduciary’s duty

of impartiality. This allocation is made

without regard to, and independent of,

the trustee’s determination with respect

to Trust income and principal. If B ex-

ercises the withdrawal power, Trustee

withdraws from the IRA the amount allo-

cated to income (or the required minimum

distribution amount under § 408(a)(6), if

greater), and distributes to B the amount

allocated to income of the IRA.

Situation 2—Unitrust Income Determi-

nation. The facts, and the terms of Trust,

are as described above. Trust is governed

by the laws of State Y . Under State Y law,

if the trust instrument specifically provides

or the interested parties consent, the in-

come of the trust means a unitrust amount

of 4 percent of the fair market value of

the trust assets valued annually. In accor-

dance with procedures prescribed by the

State Y statute, all interested parties autho-

rize the trustee to administer Trust and todetermine withdrawals from the IRA in ac-

cordance with this provision. The trustee

determines an amount equal to 4 percent

of the fair market value of the IRA assets

and an amount equal to 4 percent of the

fair market value of Trust’s assets, exclu-

sive of the IRA, as of the appropriate valu-

ation date. In accordance with the terms of

Trust, trustee distributes the amount equal

to 4 percent of the Trust assets, exclusive

of the IRA, to B, annually. In addition, if

B exercises the withdrawal power, Trustee

withdraws from the IRA the greater of therequired minimum distribution amount un-

der § 408(a)(6) or the amount equal to 4

percent of the value of the IRA assets, and

distributes to B at least the amount equal to

4 percent of the value of the IRA assets.

Situation 3—“Traditional” Definition

of Income. The facts, and the terms of

Trust, are as described above. Trust is

governed by the laws of State Z . State Z

has not enacted the UPIA, and therefore

does not have provisions comparable to

sections 104(a) and 409(c) and (d) of the

UPIA. Thus, in determining the amountof IRA income B can compel the trustee

to withdraw from the IRA, the trustee

applies the law of State Z regarding the

allocation of receipts and disbursements

to income and principal, with no power to

allocate between income and principal. As

in Situations 1 and 2, the income of Trust

is determined without regard to the IRA,

and the income of the IRA is separately

determined based on the assets of the IRA.

LAW AND ANALYSIS

Section 2056(a) provides that the valu

of the taxable estate is, except as limited b

§ 2056(b), determined by deducting from

the value of the gross estate an amoun

equal to the value of any interest in prop

erty that passes from the decedent to th

surviving spouse, to the extent that inter

est is included in the value of decedent’

gross estate.

Under § 2056(b)(1), if an interest pass

ing to the surviving spouse will terminat

or fail, no deduction is allowed with re

spect to the interest if an interest in th

property passes or has passed from th

decedent to any person other than th

surviving spouse (or the estate of th

spouse), that may be possessed or enjoye

by such other person after termination o

the spouse’s interest.

Section 2056(b)(7) provides that QTIPfor purposes of § 2056(a), is treated a

passing to the surviving spouse and n

part of the property is treated as passing t

any person other than the surviving spouse

Section 2056(b)(7)(B)(i) defines QTIP a

property that passes from the decedent, i

which the surviving spouse has a qualify

ing incomeinterestfor life, andto which a

election under § 2056(b)(7) applies. Unde

§ 2056(b)(7)(B)(ii), the surviving spous

has a qualifying income interest for lif

if, inter alia, the surviving spouse is en

titled to all the income from the propertypayable annually or at more frequent inter

vals.

Section 20.2056(b)–7(d)(2) provide

that the principles of § 20.2056(b)–5(f)

relating to whether the spouse is entitle

for life to all of the income from the prop

erty, apply in determining whether th

surviving spouse is entitled for life to al

of the income from the property for pur

poses of § 2056(b)(7).

Section 20.2056(b)–5(f)(1) provide

that, if an interest is transferred in trust

the surviving spouse is entitled for life tall of the income from the entire interes

if the effect of the trust is to give the sur

viving spouse substantially that degree o

beneficial enjoyment of the trust property

during the surviving spouse’s life that th

principles of the law of trusts accord to

person who is unqualifiedly designated a

the life beneficiary of a trust. In addition

the surviving spouse is entitled for life t

all of the income from the property if th

2006–22 I.R.B. 940 May 30, 200



spouse is entitled to income as determined

by applicable local law that provides for

a reasonable apportionment between the

income and remainder beneficiaries of the

total return of the trust and that meets the

requirements of § 1.643(b)–1.

Section 20.2056(b)–5(f)(8) provides

that the terms “entitled for life” and

“payable annually or at more frequent

intervals” require that under the terms of

the trust the income referred to must be

currently (at least annually) distributable

to the spouse or that the spouse must have

such command over the income that it is

virtually the spouse’s. Thus, the surviving

spouse will be entitled for life to all of the

income from the trust, payable annually,

if, under the terms of the trust instrument,

the spouse has the right exercisable an-

nually (or at more frequent intervals) to

require distribution to the spouse of the

trust income and, to the extent that rightis not exercised, the trust income is to be

accumulated and added to principal.

Generally, § 1.643(b)–1 provides that,

for purposes of various provisions of the

Code relating to the income taxation of es-

tates and trusts, the term “income” means

the amount of income of the estate or trust

for the taxable year determined under the

terms of the governing instrument and

applicable local law. Under § 1.643(b)–1,

trust provisions that depart fundamentally

from traditional principles of income and

principal generally will not be recognized.Under these traditional principles, items

such as dividends, interest, and rents are

generally allocated to income and pro-

ceeds from the sale or exchange of trust

assets are generally allocated to principal.

However, under § 1.643(b)–1, the allo-

cation of an amount between income and

principal pursuant to applicable local law

will be respected if local law provides for a

reasonable apportionment between the in-

come and remainder beneficiaries of the

total return of the trust for the year, includ-

ing ordinary and tax-exempt income, cap-ital gains, and appreciation. For example,

a state statute providing that income is a

unitrust amount of no less than 3 percent

and no more than 5 percent of the fair mar-

ket value of the trust assets, whether deter-

mined annually or averaged on a multiple

year basis, is a reasonable apportionment

of the total return of the trust. Similarly,

under § 1.643(b)–1, a state statute that per-

mits the trustee to make adjustments be-

tween income and principal to fulfill the

trustee’s duty of impartiality between the

income and remainder beneficiaries is gen-

erally a reasonable apportionment of the

total return of the trust.

Rev. Rul. 2000–2, 2000–1 C.B. 305,

concludes that a surviving spouse has a

qualifying income interest for life under

§ 2056(b)(7)(B)(ii) in an IRA and in a mar-

ital trust named as the beneficiary of that

IRA if the spouse has the power, exer-

cisable annually, to compel the trustee to

withdraw the income earned on the IRA

assets and to distribute that income (along

with the income earned on the trust assets

other than the IRA) to the spouse. There-

fore, assuming all other requirements of

§ 2056(b)(7) are satisfied, andprovidedthe

executor makes the election for both the

IRA and the trust, the IRA and the trust

will qualify for the marital deduction un-

der § 2056(b)(7). The revenue ruling alsoconcludes that the resultwould be the same

if the terms of the trust require the trustee

to withdraw an amount equal to the income

earned on the IRA assets and to distribute

that amount (along with the income earned

on the trust assets other than the IRA) to

the spouse.

In Situation 1, under section 104(a) of

the UPIA as enacted by State X , the trustee

of Trust allocates the total return of the as-

sets held directly in Trust (i.e., assets other

than those held in the IRA) between in-

come and principal in a manner that fulfillsthe trustee’s duty of impartiality between

the income and remainder beneficiaries.

The trustee of Trust makes a similar allo-

cation with respect to the IRA. The alloca-

tion of the total return of the IRA and the

total return of Trust in this manner consti-

tutes a reasonable apportionment of the to-

tal return of the IRA and Trust between the

income and remainder beneficiaries un-

der § 20.2056(b)–5(f)(1) and §1.643(b)–1.

Under the terms of Trust, the income of the

IRA so determined is subject to B’s with-

drawal power, and the income of Trust, sodetermined, is payable to B annually. Ac-

cordingly, the IRA and Trust meet the re-

quirements of § 20.2056(b)(7)(B)(ii) and

therefore B has a qualifying income inter-

est for life in both the IRA and Trust be-

cause B has the power to unilaterally ac-

cess all of the IRA income, and the income

of Trust is payable to B annually.

Depending upon the terms of Trust,

the impact of State X ’s version of sec-

tions 409(c) and (d) of the UPIA may

have to be considered. State X’s version

of section 409(c) of the UPIA provides

in effect that a required minimum distri-

bution from the IRA under Code section

408(a)(6) is to be allocated 10 percent to

income and 90 percent to principal. This

10 percent allocation to income, standing

alone, does not satisfy the requirements of

§§ 20.2056(b)–5(f)(1) and 1.643(b)–1, be-

cause the amount of the required minimum

distribution is not based on the total re-

turn of the IRA (and therefore the amount

allocated to income does not reflect a rea-

sonable apportionment of the total return

between the income and remainder ben-

eficiaries). The 10 percent allocation to

income also does not represent the income

of the IRA under applicable state law with-

out regard to a power to adjust between

principal and income. State X ’s version of

section 409(d) of the UPIA, requiring anadditional allocation to income if neces-

sary to qualify for the marital deduction,

may not qualify the arrangement under

§ 2056. Cf. Rev. Rul. 75–440, 1975–2

C.B. 372, using a savings clause to deter-

mine testator’s intent in a situation where

the will is ambiguous, but citing Rev. Rul.

65–144, 1965–1 C.B. 422, for the position

that savings clauses are ineffective to re-

form an instrument for federal transfer tax

purposes. Based on the facts in Situation

1, if B exercises the withdrawal power, the

trustee is obligated under Trust’s terms towithdraw the greater of all of the income of

the IRA or the annual required minimum

distribution amount under § 408(a)(6),

and to distribute at least the income of

the IRA to B. Thus, in this case, State X ’s

version of section 409(c) or (d) of UPIA

would only operate to determine the por-

tion of the required minimum distribution

amount that is allocated to Trust income,

and (because Trust income is determined

without regard to the IRA or distributions

from the IRA) would not affect the deter-

mination of the amount distributable to B.Accordingly, in Situation 1, the require-

ments of § 2056(b)(7)(B)(ii) are satisfied.

However, if the terms of a trust do not

require the distribution to B of at least

the income of the IRA in the event that B

exercises the right to direct the withdrawal

from the IRA, then the requirements of

§ 2056(b)(7)(B)(ii) may not be satisfied

unless the Trust’s terms provide that State

May 30, 2006 941 2006–22 I.R.B.



X’s version of section 409(c) of the UPIA

is not to apply.

In Situation 2, the trustee determines

the income of Trust (excluding the IRA)

and the income of the IRA under a statu-

tory unitrust regime pursuant to which

“income” is defined as a unitrust amount

of 4 percent of the fair market value

of the assets determined annually. The

determination of what constitutes Trust

income and the income of the IRA in

this manner satisfies the requirements of

§ 20.2056(b)–5(f)(1) and § 1.643(b)–1.

The Trustee distributes the income of

Trust, determined in this manner, to B an-

nually, and B has the power to compel the

trustee annually to withdraw and distribute

to B the income of the IRA, determined

in this manner. Accordingly, in Situation

2, because B has the power to unilaterally

access all income of the IRA, and the in-

come of Trust is payable to B annually, theIRA and Trust meet the requirements of

§ 20.2056(b)(7)(B)(ii). The result would

be the same if State Y had enacted both the

statutory unitrust regime and a version of

section 104(a) of the UPIA and the income

of Trust is determined under section 104(a)

of the UPIA as enacted by State Y , and the

income of the IRA is determined under the

statutory unitrust regime (or vice versa).

Under these circumstances, Trust income

and IRA income are each determined un-

der state statutory provisions applicable

to Trust that satisfy the requirements of § 20.2056(b)–5(f)(1) and § 1.643(b)–1,

and therefore B has a qualifying income

interest for life in both the IRA and Trust.

In Situation 3, B has the power to com-

pel the trustee to withdraw the income

of the IRA as determined under the law

(whether common or statutory) of a juris-

diction that has not enacted section 104(a)

of UPIA. Under the terms of Trust, if B ex-

ercises this power, the trustee must with-

draw the greater of the required minimum

distribution amount or the income of the

IRA, and at least the income of the IRAmust be distributed to B. Accordingly, in

Situation 3, the IRA and Trust meet the

requirements of § 2056(b)(7)(B)(ii), and

therefore B has a qualifying income in-

terest for life in both the IRA and Trust,

because B receives the income of Trust

(excluding the IRA) at least annually and

B has the power to unilaterally access all

of the IRA income determined in accor-

dance with § 20.2056(b)–5(f)(1). The re-

sult would be the same if State Z had en-

acted section 104(a) of the UPIA, but the

trustee decided to make no adjustments

pursuant to that provision.

In Situations 1, 2, and 3, the income of

the IRA and the income of Trust (exclud-

ing the IRA) are determined separately

and without taking into account that the

IRA distribution is made to Trust. In or-

der to avoid any duplication in determin-

ing the total income to be paid to B, the

portion of the IRA distribution to Trust

that is allocated to trust income is disre-

garded in determining the amount of trust

income that must be distributed to B under

§ 2056(b)(7).The result in Situations 1, 2, and 3

would be the same if the terms of Trust di-

rected the trustee annually to withdraw all

of the income from the IRA and to distrib-

ute to B at least the income of the IRA (in-

stead of granting B the power, exercisable

annually, to compel the trustee to do so).

Furthermore, if, instead of Trust being the

named beneficiary of a decedent’s interest

in the IRA, Trust is the named beneficiary

of a decedent’s interest in some other qual-

ified retirement plan described in section

4974(c) that is a defined contribution plan,the same principles would apply regarding

whether B is considered to have a qualify-

ing income interest for life in the qualified

retirement plan.

HOLDING

If a marital trust is the named ben-

eficiary of a decedent’s IRA (or other

qualified retirement plan described in sec-

tion 4974(c) that is a defined contribution

plan), the surviving spouse, under the

circumstances described in Situations 1,2, and 3 in this revenue ruling, will be

considered to have a qualifying income

interest for life in the IRA (or qualified

retirement plan) and in the trust for pur-

poses of an election to treat both the IRA

(or qualified retirement plan) and the trus

as QTIP under § 2056(b)(7). If the marita

deduction is sought, the QTIP electio

must be made for both the IRA and the

trust.

Taxpayers should be aware, howeve

that in situations such as those describe

in this revenue ruling in which a portion

of any distribution from the IRA to Trus

may be held in Trust for future distribu

tion rather than being distributed to B cur

rently, B is not the sole designated ben

eficiary of A’s IRA. As a result, both B

and the remainder beneficiaries must b

taken into account as designated beneficia

ries in order to determine the shortest lif

expectancy and whether only individual

are designated beneficiaries. See A–7(c

of § 1.401(a)(9)–5.

PROSPECTIVE APPLICATION

Under the authority provided by § 7805

the principles illustrated in Situations

and 2 of this revenue ruling will not b

applied adversely to taxpayers for tax

able years beginning prior to May 30

2006, in which the trust was administered

pursuant to a state statute described i

§§ 1.643(b)–1, 20.2056(b)–5(f)(1), an

20.2056(b)–7(d)(1) granting the trustee

power to adjust between income and prin

cipal or authorizing a unitrust payment in

satisfaction of the income interest of thsurviving spouse.

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 2000–2, 2000–1 C.B. 305, i

modified, and as modified, is superseded


The principal author of this revenue rul

ing isMaryBerman of the Office of the As

sociate Chief Counsel (Passthroughs anSpecial Industries). For further informa

tion regarding this revenue ruling, contac

Mary Berman at (202) 622–3090 (not

toll-free call).

2006–22 I.R.B. 942 May 30, 200



Part III. Administrative, Procedural, and Miscellaneous

Weighted Average InterestRate Update

Notice 2006–49

Sections 412(b)(5)(B) and 412(l)(7)

(C)(i) of the Internal Revenue Code gen-erally provide that the interest rates used

to calculate current liability for purposes

of determining the full funding limitation

under § 412(c)(7) and the required con-

tribution under § 412(l) must be within

a permissible range around the weighted

average of the rates of interest on 30-year

Treasury securities during the four-year

period ending on the last day before the

beginning of the plan year.

Notice 88–73, 1988–2 C.B. 383, pro-

vides guidelines for determining the

weighted average interest rate and the

resulting permissible range of interest

rates used to calculate current liability for

the purpose of the full funding limitation

of § 412(c)(7) of the Code.Section 417(e)(3)(A)(ii)(II) defines

the applicable interest rate, which must

be used for purposes of determining the

minimum present value of a participant’s

benefit under § 417(e)(1) and (2), as the

annual rate of interest on 30-year Treasury

securities for the month before the date

of distribution or such other time as the

Secretary may by regulations prescribe.

Section 1.417(e)–1(d)(3) of the Income

Tax Regulations provides that the applica-

ble interest rate for a month is the annual

interest rate on 30-year Treasury securi-

ties as specified by the Commissioner for

that month in revenue rulings, notices or

other guidance published in the Internal

Revenue Bulletin.The rate of interest on 30-year Treasury

securities for April 2006 is 5.06 percent.

The Service has determined this rate as the

monthly average of the daily determina-

tion of yield on the 30-year Treasury bond

maturing in February 2036.

The following 30-year Treasury rates

were determined for the plan years begin-

ning in the month shown below.

For Plan Years 30-Year Treasury 90% to 105% 90% to 110%Beginning in: Weighted Permissible Permissible

Month Year Average Range Range

May 2006 4.82 4.34 to 5.06 4.34 to 5.30

Drafting Information

The principal authors of this notice

are Paul Stern and Tony Montanaro of

the Employee Plans, Tax Exempt and

Government Entities Division. For fur-

ther information regarding this notice,

please contact the Employee Plans’ tax-

payer assistance telephone service at

1–877–829–5500 (a toll-free number),

between the hours of 8:30 a.m. and

4:30 p.m. Eastern time, Monday through

Friday. Mr. Stern may be reached at

1–202–283–9703. Mr. Montanaro may

be reached at 1–202–283–9714. The tele-

phone numbers in the preceding sentences

are not toll-free.

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of cor-

rect tax liability.

Rev. Proc. 2006–24

SECTION 1. PURPOSE

The purpose of this revenue procedure

is to inform the trustee (or debtor in pos-

session) representing the bankruptcy estate

of the debtor of the procedure to be fol-

lowed in obtaining a prompt determination

by the Service of any unpaid tax liability

of the estate incurred during the adminis-

tration of the case.

SECTION 2. BACKGROUND

.01 During the administration of a

bankruptcy estate, the trustee is required

to file tax returns for the estate and pay

the tax shown thereon. Under section

505(b)(2) of Title 11 of the United States

Code (hereinafter referred to as the ‘Bank-

ruptcy Code’), the trustee may request a

determination of any unpaid liability of

the estate for any tax incurred during the

administration of the case, by submitting

a tax return for the tax and a request for

prompt determination to the Service as

prescribed by section 3 of this revenue

procedure.

.02 For cases commenced under the

Bankruptcy Code on or after October 17,

2005, the effective date of the Bank-

ruptcy Abuse Protection and Consumer

Protection Act of 2005, unless the return

is fraudulent or contains a material mis-

representation, the estate, the trustee, the

debtor, and any successor to the debtor,

will be discharged from any liability for

the tax shown on a return submitted in ac-

cordance with section 2.01 of this revenue

procedure upon:

(1) payment of the tax shown on the

return unless (a) the Service notifies the

trustee, within 60 days after the request,

that the return has been selected for exam-ination, and (b) the Service completes the

examination and notifies the trustee of any

tax due, within 180 days (or any additional

time as permitted by the bankruptcy court)

after the request;

(2) payment of the tax as finally deter-

mined by the bankruptcy court; or

(3) payment of the tax as finally deter-

mined by the Service.

For cases commenced under the Bank-ruptcy Code before October 17, 2005, the

same discharge rules apply, except that

section 505(b) of the Bankruptcy Code

does not discharge the bankruptcy estate

from liability.

May 30, 2006 943 2006–22 I.R.B.



SECTION 3. REQUEST FOR

DETERMINATION

.01 To request a prompt determination

of any unpaid tax liability of the estate, the

trustee must file a signed written request,

in duplicate, with the Centralized Insol-

vency Operation, Post Office Box 21126,

Philadelphia, PA 19114 (marked, “Request

for Prompt Determination”). To be effec-

tive, the request must be filed with an exact

copy of the return (or returns) for a com-

pleted taxable period filed by the trustee

with the Service and must contain the fol-

lowing infor mation:

(1) a statement indicating that it is a re-

quest for prompt determination of tax lia-

bility and specifiying the return type and

tax period for each return for which the re-

quest is being filed;

(2) the name and location of the office

where the return was filed;

(3) the name of the debtor;

(4) the debtor’s Social Security num-

ber, taxpayer identification number (TIN)

and/or entity identification number (EIN);

(5) the type of bankruptcy estate;

(6) the bankruptcy case number; and

(7) the court where the bankruptcy ispending.

Once a request package is received by

the Centralized Insolvency Operation, the

request will be assigned to a Field Insol-

vency office.

.02 It is imperative that the copy of the

return(s) submitted with the request be an

exact copy of a valid return. A request will

be considered incomplete and returned to

the trustee if it is filed with a copy of a doc-

ument that does not qualify as a valid re-

turn. A document that does not qualify as a

valid return includes a return form filed by

the trustee with the jurat stricken, deleted,

or modified. A return must be signed un-

der penalties of perjury to qualify as a re-

turn. See Rev. Rul. 2005–59, 2005–37

I.R.B. 505 (September 12, 2005).

.03 Within 60 days after the date the

request is received, the Service will notify

the trustee whether the return filed by the

trustee is being selected for examination or

is being accepted as filed.

.04 If the return is selected for exami-

nation, it will be examined on an expedited

basis. The Service will notify the trustee of

any tax due within 180 days after the date

the request is received, or within any addi-

tional time as permitted by the bankruptcy

court..05 If the request is incomplete, all the

documents received will be returned to

the trustee by the Field Insolvency office

assigned the request with an explanation

identifying the missing item(s) and asking

that the request be refiled once corrected.

An incomplete request includes one sub-

mitted with a copy of a return form, the

original of which does not qualify as a

valid return. Once corrected, the request

must be filed with the Service at the Field

Insolvency address specified in the cor-

respondence returning the incomplete re-quest. In the case of an incomplete request

submitted with a copy of an invalid re-

turn document, the trustee must file a valid

original return with the appropriate Inter-

nal Revenue Service office and submit a

copy of that return with the corrected re-

quest when the request is refiled.

.06 The 60-day period for notifying

the trustee whether the return filed by the

trustee is being selected for examinatio

or is being accepted as filed does not begi

to run until a complete request package i

received by the Service.

.07 If an incomplete request is received

by the Service, the 60-day period for no

tifying the trustee whether the return file

by the trustee is being selected for exam

ination or is being accepted as filed doe

not begin to run until a complete reques

is received by the Field Insolvency offic

specified by the Service in its correspon

dence returning the incomplete request.

SECTION 4. EFFECT ON OTHER

DOCUMENTS

Rev. Proc. 81–17, 1981–1 C.B. 688, i

obsoleted.

SECTION 5. EFFECTIVE DATE

This revenue procedure is applicablto all cases commenced under the Bank

ruptcy Code where the bankruptcy estat

is required to file a tax return, with th

exception of chapter 9 municipal debt ad

justment cases and chapter 15 ancillar

and cross-border cases. For the proce

dure governing the prompt audit of bank

ruptcy estates in bankruptcy proceeding

commenced under the Bankruptcy Act, se

Rev. Proc. 76–23, 1976–1 C.B. 562.

SECTION 6. DRAFTING

INFORMATION

The principal author of this revenu

procedure is Donza M. Poole of the Offic

of Associate Chief Counsel (Procedure &

Administration). For further informatio

regarding this revenue procedure, contac

Donza M. Poole at (202) 622–3620 (not

toll-free call).

2006–22 I.R.B. 944 May 30, 200



26 CFR 601.202: Closing agreements.

Rev. Proc. 2006–27

TABLE OF CONTENTS

PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

SECTION 1. PURPOSE AND OVERVIEW

.01 Purpose.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948

.02 General principles underlying EPCRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948

.03 Overview.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948

SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS

.01 Effect on programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949

.02 Future enhancements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949

PART II. PROGRAM EFFECT AND ELIGIBILITY

SECTION 3. EFFECT OF EPCRS; RELIANCE.01 Effect of EPCRS on Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.02 Compliance Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.03 Other taxes and penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.04 Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

SECTION 4. PROGRAM ELIGIBILITY

.01 EPC RS Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.02 Effect of examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.03 Favorable Letter requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.04 Established practices and procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950

.05 Correction by plan amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951

.06 Submission for a determination letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951.07 Availability of correction of Employer Eligibility Failure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951

.08 Availability of correction of a terminated plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951

.09 Availability of correction of an Orphan Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951

.10 Availability of correction of § 457 plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951

.11 Egregious failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951

.12 Diversion or misuse of plan assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952

.13 Abusive tax avoidance transactions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952

PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY

SECTION 5. DEFINITIONS

.01 Definitions for Qualified Plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952

.02 Definitions for 403(b) Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953

.03 Under Examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954

.04 SEP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955

.05 SIMPLE IRA Plan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955

.06 Definitions for Orphan Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of general applicability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955

.02 Correction principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955

.03 Correction of an Employer Eligibility Failure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 957

May 30, 2006 945 2006–22 I.R.B.



.04 Correction of a failure to obtain spousal consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 957


.06 Special rules relating to Excess Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 957

.07 Rules relating to reporting plan loan failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958

.08 Correction under statute or regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958

.09 Matters subject to excise taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958

.10 Correction for SEPs and SIMPLE IRA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959

.11 Confidentiality and disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959

.12 No effect on other law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959

PART IV. SELF-CORRECTION (SCP)

SECTION 7. IN GENERAL

SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES

.01 Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

.02 Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

.03 Multiple failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

.04 Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES

.01 Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

.02 Correction period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960


.04 Substantial completion of correction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961

.05 Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961

PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCP)

SECTION 10. VCP PROCEDURES

.01 VCP requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961

.02 Identification of failures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961

.03 Effect of VCP submission on examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961

.04 No concurrent examination activity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961

.05 Determination letter application for plan amendments related to a VCP submission. . . . . . . . . . . . . . . . . . . . . . . . 962

.06 Determination letter applications not related to a VCP submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962

.07 Processing of submission.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962

.08 Compliance statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 963

.09 Effect of compliance statement on examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 963

.10 Special rules relating to Anonymous (John Doe) Submissions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 963

.11 Special rules relating to Group Submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964

.12 Multiemployer and multiple employer plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964

SECTION 11. APPLICATION PROCEDURES FOR VCP

.01 General rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965

.02 Submission requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965

.03 Required documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965

.04 Date fee due generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.05 Additional fee due for SEPs, SIMPLE IRA Plans and Group Submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.06 Signed submission.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.07 Power of attorney requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.08 Penalty of perjury statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.09 Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.10 Designation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.11 Acknowledgement letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.12 VCP mailing address. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

2006–22 I.R.B. 946 May 30, 200



.13 Maintenance of copies of submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

.14 Assembling the submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966

SECTION 12. VCP FEES

.01 VCP fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 967

.02 VCP fees for Qualified Plans and 403(b) Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 967

.03 VCP fee for nonamenders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.04 VCP fee for Group Submission.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.05 VCP fee for SEPs and SIMPLE IRA Plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.06 VCP fee for egregious failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.07 Establishing the number of plan participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

PART VI. CORRECTION ON AUDIT (AUDIT CAP)

SECTION 13. DESCRIPTION OF AUDIT CAP

.01 Audit CAP requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.02 Payment of sanction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.03 Additional requirements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.04 Failure to reach resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.05 Effect of closing agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968

.06 Other procedural rules.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969

SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969

.02 Factors considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969

.03 Transferred Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969

.04 Fee for nonamenders discovered during the determination letter application process not related to a VCP

submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969

PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK REDUCTION ACT

SECTION 15. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2003–44 modified and superseded .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970

SECTION 16. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970

SECTION 17. PAPERWORK REDUCTION ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970


APPENDIX A: OPERATIONAL FAILURES AND CORRECTION METHODS

.01 General rule.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970

.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-key employees. . . . . . . . . . . . . . . 970

.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth in § 401(m)(2), or, for plan years

beginning on or before December 31, 2001, the multiple use test of § 401(m)(9). . . . . . . . . . . . . . . . . . . . . . . . . . . 970

.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). . . . . . . 971

.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 971

.06 Failure to timely pay the minimum distribution required under § 401(a)(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972

.07 Failure to obtain participant or spousal consent for a distribution subject to the participant and spousal

consent rules under §§ 401(a)(11), 411(a)(11), and 417 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972

.08 Failure to satisfy the § 415 limits in a defined contribution plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972

May 30, 2006 947 2006–22 I.R.B.



APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS AND EXAMPLES

SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES

.01 Purpose.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972

.02 Assumptions for Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973

.03 Section References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973

SECTION 2. CORRECTION METHODS AND EXAMPLES

.01 ADP/ACP Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973

.02 Exclusion of Otherwise Eligible Employees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 974

.03 Vesting Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980

.04 § 415 Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980

.05 Correction of Other Overpayment Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982

.06 § 401(a)(17) Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982

.07 Correction by Amendment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 983

SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES

.01 Earnings Adjustment Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 984

.02 Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 985

APPENDIX C: VCP CHECKLIST.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 989

APPENDIX D: SAMPLE FORMATS FOR VCP SUBMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992

APPENDIX E: ACKNOWLEDGEMENT LETTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 998

APPENDIX F: VCP SAMPLE SUBMISSION FOR INTERIM NONAMENDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 999

PART I. INTRODUCTION TO

EMPLOYEE PLANS COMPLIANCE

RESOLUTION SYSTEM

SECTION 1. PURPOSE AND

OVERVIEW

.01 Purpose. This revenue procedure

updates the comprehensive system of

correction programs for sponsors of retire-

ment plans that are intended to satisfy the

requirements of § 401(a), 403(a), 403(b),

408(k), or 408(p) of the Internal Revenue

Code (the “Code”), but that have not met

these requirements for a period of time.

This system, the Employee Plans Com-

pliance Resolution System (“EPCRS”),

permits plan sponsors to correct these

failures and thereby continue to providetheir employees with retirement benefits

on a tax-favored basis. The components

of EPCRS are the Self-Correction Pro-

gram (“SCP”), the Voluntary Correction

Program (“VCP”), and the Audit Closing

Agreement Program (“Audit CAP”).

.02 General principles underlying

EPCRS. EPCRS is based on the following

general principles:

• Sponsors and other administrators of

eligible plans should be encouraged to

establish administrative practices and

procedures that ensure that these plans

are operated properly in accordance

with the applicable requirements of the Code.

• Sponsors and other administrators of

eligible plans should satisfy the appli-

cable plan document requirements of

the Code.

• Sponsors and other administrators

should make voluntary and timely cor-

rection of any plan failures, whether

involving discrimination in favor of

highly compensated employees, plan

operations, the terms of the plan doc-

ument, or adoption of a plan by an

ineligible employer. Timely and effi-cient correction protects participating

employees by providing them with

their expected retirement benefits, in-

cluding favorable tax treatment.

• Voluntary compliance is promoted by

providing for limited fees for volun-

tary corrections approved by the Ser-

vice, thereby reducing employers’ un-

certainty regarding their potential tax

liability and participants’ potential ta

liability.

• Fees and sanctions should be grad

uated in a series of steps so tha

there is always an incentive to cor

rect promptly.• Sanctions for plan failures identifie

on audit should be reasonable in ligh

of the nature, extent, and severity of th

violation.

• Administration of EPCRS should b

consistent and uniform.

• Sponsors should be able to rely on th

availability of EPCRS in taking correc

tive actions to maintain the tax-favore

status of their plans.

.03 Overview. EPCRS includes the fol

lowing basic elements:

• Self-correction (SCP). A Plan Sponso

that has established compliance prac

tices and procedures may, at any tim

without paying any fee or sanction

correct insignificant Operational Fail

ures under a Qualified Plan or a 403(b

Plan, or a SEP or a SIMPLE IRA Plan

provided the SEP or SIMPLE IRA

Plan is established and maintained o

a document approved by the Service

2006–22 I.R.B. 948 May 30, 200



In addition, in the case of a Qualified

Plan that is the subject of a favorable

determination letter from the Service

or in the case of a 403(b) Plan, the Plan

Sponsor generally may correct even

significant Operational Failures with-

out payment of any fee or sanction.

• Voluntary correction with Service ap-

proval (VCP). A Plan Sponsor, at any

time before audit, may pay a limited

fee and receive the Service’s approval

for correction of a Qualified Plan,

403(b) Plan, SEP or SIMPLE IRA

Plan. Under VCP, there are special

procedures for anonymous submis-

sions and group submissions.

• Correction on audit (Audit CAP). If a

failure (other than a failure corrected

through SCP or VCP) is identified on

audit, the Plan Sponsor may correct

the failure and pay a sanction. The

sanction imposed will bear a reason-able relationship to the nature, extent,

and severity of the failure, taking into

account the extent to which correction

occurred before audit.

SECTION 2. EFFECT OF THIS

REVENUE PROCEDURE ON

PROGRAMS

.01 Effect on programs. This revenue

procedure modifies and supersedes Rev.

Proc. 2003–44, 2003–1 C.B. 1051, which

was the prior consolidated statement of thecorrection programs under EPCRS. The

modifications to Rev. Proc. 2003–44 that

are reflected in this revenue procedure in-

clude:

• providing that if the Plan Sponsor cor-

rects the failures in accordance with

the requirements of this revenue pro-

cedure, the plan will be treated as sat-

isfying § 401(a), § 403(b), § 408(k),

or § 408(p), as applicable, for purposes

of applying § 3121(a)(5) (FICA taxes)

and § 3306(b)(5) (FUTA taxes) (sec-tion 3.01)

• revising the requirements for submit-

ting a determination letter application

when correcting certain Qualification

Failures by plan amendment (sections

4.06, 10.08, and 11.03(3))

• clarifying that an egregious failure in-

cludes providing more favorable ben-

efits to an owner based on a purported

collective bargaining agreement where

there has in fact been no good faith bar-

gaining (section 4.11)

• providing rules relating to the avail-

ability of programs under EPCRS in

cases where the plan or plan sponsor

is a party to an abusive tax avoid-

ance transaction (sections 4.13 and

11.02(11))

• updating the definition of Favorable

Letter (section 5.01(4))

• revising provisions affecting 403(b)

plans by revising the definition of Ex-

cess Amounts (section 5.02(3))

• updating the definition of Under Ex-

amination (section 5.03)

• expanding VC and Audit CAP to

terminating Orphan Plans and, with

respect to those plans, providing for

a possible exception to the require-

ment for full correction and a waiver

of the VCP fee in appropriate circum-

stances (sections 5.06, 6.02(5)(f), and12.02(3))

• adding a correction method for certain

plan loan failures (sections 6.02(6)

and 6.07), including adding a correc-

tion method for a plan that permits

plan loans operationally but does not

have the appropriate plan loan lan-

guage (Appendix B 2.07(2))

• revising the correction method for a

failure to include an eligible employee

in a cash or deferred arrangement un-

der § 401(k) (section 6.02(7), Appen-

dix A .05, and Appendix B 2.02)• adding an alternative correction

method for a failure to obtain spousal

consent (section 6.04(2)(c))

• revising provisions affecting 403(b)

plans by eliminating the term Total

Sanction Amount and replacing it

with the term “Maximum Payment

Amount” and eliminating correction

by retention of Excess Amounts (sec-

tions 5.02(4) and 6.06(2))

• providing that as part of both VCP

and Audit CAP, if the failure involves

the failure to satisfy the minimumrequired distribution requirements of

§ 401(a)(9), the Service will waive the

excise tax requirements of § 4974 in

appropriate cases (section 6.09(2))

• expanding excise taxes that the Service

may not pursue (section 6.09(3) and

(4))

• clarifying the scope of a compliance

statement issued with respect to certain

nonamender failures

• clarifying submission procedures for

Anonymous Submissions (section

10.10), and Group Submissions (sec-

tion 10.11)

• revising the acknowledgement proce-

dures of receipt of a submission (sec-

tion 11.11 and new Appendix E — Ac-

knowledgement Letter)

• providing a submission assembly pro-

cedure (section 11.14)

• reducing the compliance fee for a plan

where the sole failure is the failure to

satisfy the minimum distribution rules

for 50 or fewer employees (section

12.02(2))

• reducing the compliance fee for a plan

where the sole failure is the failure to

timely adopt certain plan amendments

(section 12.03)

• reducing the general compliance fee

for SEPs and SIMPLE IRAs (section

12.05)• adding a fee schedule for plans in the

determination letter process found to

be nonamenders of tax law changes

(section 14.04)

• providing that if a nonamender fail-

ure is discovered during an Employee

Plans Examination, then it is expected

that the applicable sanction will be

greater than the applicable fee under

section 14.04 (section 14.02)

• providing a streamlined submission

procedure for certain nonamender fail-

ures (Appendix F).02 Future enhancements. (1) It is ex-

pected that the EPCRS revenue procedure

will continue to be updated from time to

time, including, as noted above, further

improvements to EPCRS based on com-

ments previously received. In addition,

the Service and Treasury continue to in-

vite further comments on how to improve

EPCRS. Comments should be sent to:

Internal Revenue Service

Attention: SE:T:EP:RA:VC

1111 Constitution Avenue, NWWashington, D.C. 20224

(2) Comments are requested for certain

specific issues under EPCRS. First, com-

ments are requested regarding methods

to correct a failure to provide an eligi-

ble employee the opportunity to make a

catch-up contribution that is permitted

under the terms of the plan and § 414(v).

(See 6.02(7) and Appendix B 2.02.) Sec-

May 30, 2006 949 2006–22 I.R.B.



ond, given that § 402A permits a § 401(a)

or 403(b) plan to offer employees the op-

portunity to designate elective deferrals as

Roth contributions for taxable years begin-

ning after December 31, 2005, comments

are requested regarding methods to correct

a failure to provide an eligible employee

with the opportunity to make elective de-

ferrals for a plan that permits an eligible

employee to designate elective deferrals

as Roth contributions. Third, the correc-

tion mechanism in current §1.415–6(b)(6)

of the Income Tax Regulations is not

included in the regulations that were pro-

posed under § 415 (70 FR 31214) and

published on May 31, 2005. The preamble

to the proposed regulations provides that

the correction mechanism (for excess an-

nual additions) will be included in EPCRS

in the future. It is expected that correction

mechanism will in any event continue to

be available under EPCRS, including un-der SCP where correction of a significant

operational failure is permitted. Accord-

ingly, comments are requested regarding

the applicable correction methods for this

failure. Comments are also requested

on whether the correction mechanisms

provided for in current §1.415–6(b)(6),

including the maintenance of suspense

accounts, should be retained as options

under EPCRS, or whether correction of

excess annual additions should be treated

as excess amounts under this revenue

procedure (i.e., distributed or forfeited,as appropriate). Fourth, comments are

requested regarding whether additional

correction methods are needed in order

for plans to take advantage of the fidu-

ciary safe harbor recently issued by the

Department of Labor for Orphan Plans

(71 FR 20820) where the plan is subject

to the requirements of §§ 401(a)(11) and

417 in light of the ability to satisfy those

requirements by purchase of a commercial

annuity contract.

PART II. PROGRAM EFFECT ANDELIGIBILITY

SECTION 3. EFFECT OF EPCRS;

RELIANCE

.01 Effect of EPCRS on retirement

plans. For a Qualified Plan, a 403(b)

Plan, a SEP, or a SIMPLE IRA Plan, if

the eligibility requirements of section 4

are satisfied and the Plan Sponsor cor-

rects a failure in accordance with the

applicable requirements of SCP in section

7, VCP in sections 10 and 11, or Audit

CAP in section 13, the Service will not

treat the retirement plan as failing to meet

§ 401(a), § 403(b), § 408(k), or § 408(p),

as applicable. Thus, for example, if the

Plan Sponsor corrects the failures in ac-

cordance with the requirements of this

revenue procedure, the plan will be treated

as satisfying § 401(a), § 403(b), § 408(k),

or § 408(p), as applicable, for purposes of

applying § 3121(a)(5) (FICA taxes) and

§ 3306(b)(5) (FUTA taxes).

.02 Compliance statement . If a Plan

Sponsor or Eligible Organization receives

a compliance statement under VCP, the

compliance statement is binding upon the

Service and the Plan Sponsor or Eligible

Organization as provided in section 10.09.

.03 Other taxes and penalties. See sec-

tion 6.09 for rules relating to other taxesand penalties.

.04 Reliance. Taxpayers may rely on

this revenue procedure, including the relief

described in section 3.01.

SECTION 4. PROGRAM ELIGIBILITY

.01 EPCRS Programs. (1) SCP. SCP

is available only for Operational Failures.

Qualified Plans and 403(b) Plans are eligi-

ble for SCP with respect to significant and

insignificant Operational Failures. SEPs

and SIMPLE IRA Plans are eligible for SCP with respect to insignificant Opera-

tional Failures only.

(2) VCP. Qualified Plans, 403(b) Plans,

SEPs and SIMPLE IRA Plans are eligible

for VCP. VCP provides general proce-

dures for correction of all Qualification

Failures: Operational, Plan Document,

Demographic, and Employer Eligibility.

(3) Audit CAP. Audit CAP is available

for Qualified Plans, 403(b) Plans, SEPs

and SIMPLE IRA Plans for correction of

all failures found on examination that have

not been corrected in accordance with SCPor VCP.

(4) Eligibility for other arrangements.

The Service may extend EPCRS to other

arrangements.

.02 Effect of examination. If the plan or

Plan Sponsor is Under Examination, VCP

is not available and SCP is only available

as follows: while the plan or Plan Sponsor

is Under Examination, insignificant Op-

erational Failures can be corrected under

SCP; and, if correction has been complete

or substantially completed before the pla

or Plan Sponsor is Under Examination

correction of significant Operational Fail

ures can be completed under SCP.

.03 Favorable Letter requirement . Th

provisions of SCP relating to significan

Operational Failures (see section 9) ar

available for a Qualified Plan only if th

plan is the subject of a Favorable Letter

The provisions of SCP relating to insignif

icant Operational Failures (see section 8

are available for a SEP but only if th

plan document consists of either (i) a vali

Model Form 5305–SEP or 5305A–SEP

adopted by an employer in accordanc

with the instructions on the applicabl

form (see Rev. Proc. 2002–10, 2002–

C.B. 401), or (ii) a prototype SEP that ha

a current favorable opinion letter which

has been amended in accordance wit

the procedures set forth in Rev. Proc2002–10. The provisions of SCP relatin

to insignificant Operational Failures (se

section 8) are available for a SIMPLE

IRA Plan but only if the plan documen

consists of either (i) a valid Model Form

5305–SIMPLE or 5304–SIMPLE adopte

by an employer in accordance with the in

structions on the applicable form (see Rev

Proc. 2002–10), or (ii) a current favorabl

opinion letter for a Plan Sponsor that ha

adopted a prototype SIMPLE IRA Plan

which has been amended in accordanc

with the procedures set forth in Rev. Proc2002–10.

.04 Established practices and proce

dures. In order to be eligible for SCP, th

Plan Sponsor or administrator of a pla

must have established practices and pro

cedures (formal or informal) reasonabl

designed to promote and facilitate over

all compliance with applicable Code re

quirements. For example, the plan ad

ministrator of a Qualified Plan that ma

be top-heavy under § 416 may include in

its plan operating manual a specific an

nual step to determine whether the planis top-heavy and, if so, to ensure that the

minimum contribution requirements of th

top-heavy rules are satisfied. A plan docu

ment alone does not constitute evidence o

established procedures. In order for a Pla

Sponsor or administrator to use SCP, thes

established procedures must have been i

place and routinely followed, and an Oper

ational Failure must have occurred throug

an oversight or mistake in applying them

2006–22 I.R.B. 950 May 30, 200



In addition, SCP may also be used in sit-

uations where the operational failure oc-

curred because the procedures that were

in place, while reasonable, were not suffi-

cient to prevent the occurrence of the fail-

ure. In the case of a failure that relates to

Transferred Assets or to a plan assumed in

connection with a corporate merger, acqui-

sition, or other similar employer transac-

tion between the Plan Sponsor and spon-

sor of the transferor plan or the prior plan

sponsor of an assumed plan, the plan is

considered to have established practices

and procedures for the Transferred Assets

if such practices and procedures are in

effect for the Transferred Assets by the

end of the first plan year that begins after

the corporate merger, acquisition, or other

similar transaction.

.05 Correction by plan amendment . (1)

Availability of correction by plan amend-

ment in VCP and Audit CAP. A Plan Spon-sor may use VCP and Audit CAP for a

Qualified Plan to correct Plan Document,

Demographic, and Operational Failures by

a plan amendment, including correcting an

Operational Failure by plan amendment to

conform the terms of the plan to the plan’s

prior operations, provided that the amend-

ment complies with the requirements of

§ 401(a), including the requirements of

§§ 401(a)(4), 410(b), and 411(d)(6). In

addition, a Plan Sponsor may correct an

Operational Failure by plan amendment

to amend the plan to the extent neces-sary to reflect the corrective action. For

example, if the plan failed to satisfy the

average deferral percentage (“ADP”) test

required under § 401(k)(3) and the Plan

Sponsor must make qualified nonelective

contributions not already provided for un-

der the plan, the plan may be amended

to provide for qualified nonelective con-

tributions. Except as provided in section

4.06, the issuance of a compliance state-

ment does not constitute a determination as

to the effect of any plan amendment on the

qualification of the plan.(2) Availability of correction by plan

amendment in SCP. A Plan Sponsor may

use SCP for a Qualified Plan to correct an

Operational Failure by a plan amendment

in order to conform the terms of the plan

to the plan’s prior operations only to cor-

rect Operational Failures listed in section

2.07 of Appendix B. These failures must

be corrected in accordance with the cor-

rection methods set forth in section 2.07 of

Appendix B. SCP is not otherwise avail-

able for a Plan Sponsor to correct an Oper-

ational Failure by a plan amendment. Any

plan amendment must comply with the re-

quirements of § 401(a), including the re-

quirements of §§ 401(a)(4), 410(b), and

411(d)(6).

.06 Submission for a determination

letter . (1) Under VCP and Audit CAP,

a determination letter will be issued to

correct a nonamender failure. In addition,

a determination letter may be issued (a)

to correct a failure in a plan that is either

submitted under VCP or that is being ex-

amined during the last 12 months of the

plan’s remedial amendment cycle, as de-

fined in section 13 of Rev. Proc. 2005–66,

2005–37 I.R.B. 509 (an “on-cycle” filing),

or (b) to correct a failure in either a VCP

filing submitted for a terminating plan or

a terminating plan under examination. For

this purpose, the term “nonamender fail-ure” means a failure to amend the plan to

reflect a change in a qualification require-

ment within the plan’s applicable remedial

amendment period, as set forth in Rev.

Proc. 2005–66. A change in a qualifica-

tion requirement includes a change arising

from a statutory change, or a change in

the requirements provided in regulations

or other guidance published in the Internal

Revenue Bulletin. A determination letter

issued under VCP with respect to a nona-

mender failure will include only a determi-

nation on all applicable laws with respectto which the remedial amendment period

has expired. Notwithstanding the above, a

determination letter will not be issued with

respect to a failure to amend a plan timely

for (a) good faith plan amendments for the

Economic Growth and Tax Relief Rec-

onciliation Act of 2001, Pub. L. 107–16

(EGTRRA), within the period described in

Notice 2001–42, 2001–2 C.B. 70, includ-

ing those changes listed in Notice 2005–5,

2005–3 I.R.B. 337, (b) plan amendments

for the final and temporary regulations

under §401(a)(9) as they appeared in theApril 1, 2003, edition of 26 CFR Part

1 (the § 401(a)(9) final and temporary

regulations) within the period described

in Rev. Proc. 2002–29, 2002–1 C.B.

1176, as modified by Rev. Proc. 2003–10,

2003–1 C.B. 259, and (c) interim amend-

ments as provided in section 5 of Rev.

Proc. 2005–66. The preceding sentence is

not applicable if (i) the failure is submitted

in a VCP filing made during an on-cycle

year, (ii) the plan is being examined dur-

ing an on-cycle year, (iii) the failure is

submitted in a VCP filing for a terminat-

ing plan, or (iv) the plan is a terminating

plan Under Examination. Except as pro-

vided in section 10.08, in cases where

a determination letter is not issued with

respect to failures corrected through plan

amendment, the issuance of a compliance

statement or closing agreement will con-

stitute a determination as to the effect of

any plan amendment on the qualification

of the plan. Notwithstanding any other

provision of this section 4.06, the Service

reserves the right to require the submis-

sion of a determination letter application

with respect to any amendment proposed

or adopted to correct any Qualification

Failure under VCP or Audit CAP.

(2) In the case of any correction of an

Operational Failure through plan amend-

ment under SCP, as permitted under sec-tion 4.05(2), a Plan Sponsor must submit

a determination letter application. The de-

termination letter application must be sub-

mitted before the end of the plan’s applica-

ble remedial amendment period described

in Rev. Proc. 2005–66. As part of the de-

termination letter submission, the amend-

ment under SCP must be identified as such

in the cover letter.

.07 Availability of correction of Em-

ployer Eligibility Failure. SCP is not avail-

able for a Plan Sponsor to correct an Em-

ployer Eligibility Failure..08 Availability of correction of a ter-

minated plan. Correction of Qualification

Failures in a terminated plan may be made

under VCP and Audit CAP, whether or not

the plan trust is still in existence.

.09 Availability of correction of an Or-

phan Plan. An Orphan Plan that is termi-

nating may be corrected under VCP and

Audit CAP, provided that the party acting

on behalf of the plan is an Eligible Party,

as defined in section 5.06(2).

.10 Availability of correction of § 457

plans. Submissions relating to § 457(b) el-igible governmental plans will be accepted

by the Service on a provisional basis out-

side of EPCRS through standards that are

similar to EPCRS.

.11 Egregious failures. SCP is not avail-

able to correct Operational Failures that

are egregious. For example, any of the

following would be considered egregious:

(a) a plan has consistently and improp-

erly covered only highly compensated em-

May 30, 2006 951 2006–22 I.R.B.



ployees; (b) a plan provides more favor-

able benefits for an owner of the employer

based on a purported collective bargain-

ing agreement where there has in fact been

no good faith bargaining between bona

fide employee representatives and the em-

ployer (see Notice 2003–24, 2003–1 C.B.

853, with respect to welfare benefit funds);

or (c) a contribution to a defined contri-

bution plan for a highly compensated em-

ployee is several times greater than the dol-

lar limit set forth in § 415. VCP is avail-

able to correct egregious failures; how-

ever, these failures are subject to the fees

described in section 12.06. Audit CAP

also is available to correct egregious fail-

ures.

.12 Diversion or misuse of plan assets.

SCP, VCP, and Audit CAP are not avail-

able to correct failures relating to the di-

version or misuse of plan assets.

.13 Abusive tax avoidance transactions.(1) Effect on Programs. (a) SCP. With re-

spect to SCP, in the event that the plan or

the Plan Sponsor has been a party to an

abusive tax avoidance transaction (as de-

fined in section 4.13(2)), SCP is not avail-

able to correct any Operational Failure that

is directly or indirectly related to the abu-

sive tax avoidance transaction.

(b) VCP. With respect to VCP, if the

Service determines that a plan or Plan

Sponsor was, or may have been, a party to

an abusive tax avoidance transaction (as

defined in section 4.13(2)), then the matter will be referred to the Internal Revenue

Service’s Employee Plans’ Tax Shelter

Coordinator. Upon receiving a response

from the Tax Shelter Coordinator, the Ser-

vice may determine that the plan or the

Plan Sponsor has been a party to an abu-

sive tax avoidance transaction, and that

the failures addressed in the VCP sub-

mission are related to that transaction. In

those situations, the Service will conclude

the review of the submission without is-

suing a compliance statement and will

refer the case for examination. However,if the Tax Shelter Coordinator determines

that the plan failures are unrelated to the

abusive tax avoidance transaction or that

no abusive tax avoidance transaction oc-

curred, then the Service will continue to

address the failures identified in the VCP

submission, and may issue a compliance

statement with respect to those failures.

In no event may a compliance statement

be relied on for the purpose of concluding

that the plan or Plan Sponsor was not a

party to an abusive tax avoidance transac-

tion. In addition, even if it is concluded

that the failures can be addressed pursuant

to a VCP submission, the Service reserves

the right to make a referral of the abusive

tax avoidance transaction matter for ex-

amination.

(c) Audit CAP and SCP (for plans

Under Examination). For plans Under Ex-

amination, if the Service determines that

the plan or Plan Sponsor was, or may have

been, a party to an abusive tax avoidance

transaction, the matter may be referred to

the Internal Revenue Service’s Employee

Plans’ Tax Shelter Coordinator. With

respect to plans Under Examination, an

abusive tax avoidance transaction includes

a transaction described in section 4.13(2)

and any other transaction that the Service

determines was designed to facilitate the

impermissible avoidance of tax. Uponreceiving a response from the Tax Shelter

Coordinator, (i) if the Service determines

that a failure is related to the abusive

tax avoidance transaction, the Service re-

serves the right to conclude that neither

Audit CAP nor SCP is available for that

failure and (ii) if the Service determines

that satisfactory corrective actions have

not been taken with regard to the trans-

action, the Service reserves the right to

conclude that neither Audit CAP nor SCP

is available to the plan.

(2) Definition. For purposes of sec-tion 4.13(1) (except to the extent otherwise

provided in section 4.13(1)(c)), an abu-

sive tax avoidance transaction means any

listed transaction under § 1.6011–4(b)(2)

and any other transaction identified as an

abusive transaction in the IRS website en-

titled “EP Abusive Tax Transactions.”

PART III. DEFINITIONS,

CORRECTION PRINCIPLES,

AND RULES OF GENERAL

APPLICABILITY

SECTION 5. DEFINITIONS

The following definitions apply for pur-

poses of this revenue procedure:

.01 Definitions for Qualified Plans. The

definitions in this section 5.01 apply to

Qualified Plans.

(1) Qualified Plan. The term “Qualified

Plan” means a plan intended to satisfy the

requirements of § 401(a) or § 403(a).

(2) Qualification Failure. The term

“Qualification Failure” means any failur

that adversely affects the qualification of

plan. There are four types of Qualificatio

Failures: (a) Plan Document Failures; (b

Operational Failures; (c) Demographi

Failures; and (d) Employer Eligibilit

Failures.

(a) Plan Document Failure. The term

“Plan Document Failure” means a pla

provision (or the absence of a plan pro

vision) that, on its face, violates the re

quirements of § 401(a) or § 403(a). Thus

for example, the failure of a plan to b

amended to reflect a new qualification re

quirement within the plan’s applicable re

medial amendment period under § 401(b

is a Plan Document Failure. In addition

if a plan has not been timely or prop

erly amended during an applicable reme

dial amendment period for adopting goo

faith or interim amendments with respecto disqualifying provisions, as describe

in §1.401(b)–1(b)(1), the plan is consid

ered to have a Plan Document Failure. Fo

purposes of this revenue procedure, a Plan

Document Failure includes any Qualifica

tion Failure that is a violation of the re

quirements of § 401(a) or § 403(a) and

that is not an Operational Failure, Demo

graphic Failure, or Employer Eligibilit

Failure.

(b) Operational Failure. The term “Op

erational Failure” means a Qualificatio

Failure (other than an Employer EligibilitFailure) that arises solely from the failur

to follow plan provisions. A failure to fol

low the terms of the plan providing for th

satisfaction of the requirements of § 401(k

and § 401(m) is considered to be an Op

erational Failure. A plan does not hav

an Operational Failure to the extent th

plan is permitted to be amended retroac

tively to reflect the plan’s operations (e.g

pursuant to § 401(b)). In the situatio

where a Plan Sponsor timely adopted

good faith or interim amendment which i

not a disqualifying provision as describein § 1.401(b)–1(b)(1), and the plan was no

operated in accordance with the terms o

such amendment, the plan is considered t

have an Operational Failure.

(c) Demographic Failure. The term

“Demographic Failure” means a failur

to satisfy the requirements of § 401(a)(4)

401(a)(26), or 410(b) that is not an Oper

ational Failure or an Employer Eligibilit

Failure. The correction of a Demographi

2006–22 I.R.B. 952 May 30, 200



Failure generally requires a corrective

amendment to the plan adding more ben-

efits or increasing existing benefits (cf.

§ 1.401(a)(4)–11(g)).

(d) Employer Eligibility Failure. The

term “Employer Eligibility Failure” means

the adoption of a plan intended to include

a qualified cash or deferred arrangement

and satisfy the requirements of § 401(a)

or §403(a) by an employer that fails to

meet the employer eligibility requirements

to establish a § 401(k) plan. An Employer

Eligibility Failure is not a Plan Document,

Operational, or Demographic Failure.

(3) Excess Amount . The term “Excess

Amount” means (a) an Overpayment, (b)

an elective deferral or employee after-tax

contribution returned to satisfy § 415, (c)

an elective deferral in excess of the lim-

itation of § 402(g) that is distributed, (d)

an excess contribution or excess aggregate

contribution that is distributed to satisfy§ 401(k) or § 401(m), (e) an elective de-

ferral that is distributed to satisfy the lim-

itation of § 401(a)(17), or (f) any similar

amount that is required to be distributed in

order to maintain plan qualification.

(4) Favorable Letter . The term “Favor-

able Letter” means, in the case of a Qual-

ified Plan, a current favorable determina-

tion letterfor an individually designed plan

(including a volume submitter plan that is

not identical to an approved volume sub-

mitter plan), a current favorable opinion

letter for a Plan Sponsor that has adopteda master or prototype plan, (standardized

or nonstandardized), or a current favor-

able advisory letter and certification that

the Plan Sponsor has adopted a plan that is

identical to an approved volume submitter

plan. A plan has a current favorable deter-

mination letter, opinion letter, or advisory

letter if (a), (b), (c), or (d) below is satis-

fied:

(a) The plan has a favorable determi-

nation letter, opinion letter, or advisory

letter/certification that considers GUST

(GUST is an acronym for the UruguayRound Agreements Act (GATT), the Uni-

formed Services Employment and Reem-

ployment Rights Act of 1994 (USERRA),

the Small Business Job Protection Act of

1996 (SBJPA), the Taxpayer Relief Act

of 1997 (TRA ’97), the Internal Revenue

Service Restructuring and Reform Act

of 1998 (RRA ’98), and the Community

Renewal Tax Relief Act of 2000 (CRA).)

(b) The plan is initially adopted or ef-

fective after December 31, 2001, and the

Plan Sponsor timely submits an applica-

tion for a determination letter or adopts an

approved master or prototype plan or vol-

ume submitter plan within the plan’s reme-

dial amendment period under § 401(b).

(c) The plan is terminated prior to the

expiration of the applicable GUST reme-

dial amendment period under § 401(b) and

the plan was amended to reflect the provi-

sions of GUST (including § 415, as pro-

vided in Rev. Rul. 2002–27, 2002–1 C.B.

925, in the case of defined contribution

plans), the provisions of the 401(a)(9) final

and temporary regulations, and in the case

of defined benefit plans, the 1994 Group

Annuity Reserving Table (94 GAR) (see

Rev. Rul. 2001–62, 2001–2 C.B. 632).

(d) The plan is terminated prior to the

expiration of the applicable Economic

Growth and Tax Relief ReconciliationAct of 2001 (EGTRRA) remedial amend-

ment period under § 401(b) and the plan

was amended to reflect the provisions of

EGTRRA and any other legislation that

was in effect when the plan was termi-

nated.

(5) Maximum Payment Amount . The

term “Maximum Payment Amount”

means a monetary amount that is ap-

proximately equal to the tax the Service

could collect upon plan disqualification

and is the sum for the open taxable years

of the:(a) tax on the trust (Form 1041) (and

any interest or penalties applicable to the

trust return),

(b) additional income tax resulting from

the loss of employer deductions for plan

contributions (and any interest or penalties

applicable to the Plan Sponsor’s return),

(c) additional income tax resulting from

income inclusion for participants in the

plan (Form 1040), including the tax on

plan distributions that have been rolled

over to other qualified trusts (as defined

in § 402(c)(8)(A)) or eligible retirementplans (as defined in § 402(c)(8)(B)) (and

any interest or penalties applicable to the

participants’ returns), and

(d) any other tax that results from a

Qualification Failure that would apply but

for the correction under this revenue pro-

cedure.

(6) Overpayment . The term “Overpay-

ment” means a distribution to an employee

or beneficiary that exceeds the employee’s

or beneficiary’s benefit under the terms

of the plan, including a distribution that

results from a failure to comply with

plan terms that implement § 401(a)(17),

§ 401(m) (but only with respect to the

forfeiture of nonvested matching contri-

butions that are excess aggregate contri-

butions), § 411(a)(3)(G), or § 415. An

Overpayment does not include a distribu-

tion of any Excess Amount described in

section 5.01(3)(b) through (f).

(7) Plan Sponsor . The term “Plan

Sponsor” means the employer that estab-

lishes or maintains a qualified retirement

plan for its employees.

(8) Transferred Assets. The term

“Transferred Assets” means plan assets

that were received, in connection with

a corporate merger, acquisition or other

similar employer transaction, by the plan

in a transfer (including a merger or consol-

idation of plan assets) under § 414(l) froma plan sponsored by an employer that was

not a member of the same controlled group

as the Plan Sponsor immediately prior to


similar employer transaction. If a transfer

of plan assets related to the same employer

transaction is accomplished through sev-

eral transfers, then the date of the transfer

is the date of the first transfer.

.02 Definitions for 403(b) Plans. The

definitions in this section 5.02 apply to

403(b) Plans.

(1) 403(b) Plan. The term “403(b)Plan” means a plan or program intended

to satisfy the requirements of § 403(b).

(2) 403(b) Failure. A 403(b) Failure

is any Operational, Demographic, or Em-

ployer Eligibility Failure as defined below.

(a) Operational Failure. The term “Op-

erational Failure” means any of the follow-

ing:

(i) A failure to satisfy the requirements

of § 403(b)(12)(A)(ii) (relating to the

availability of salary reduction contribu-

tions);

(ii) A failure to satisfy the requirementsof § 401(m) (as applied to 403(b) Plans

pursuant to § 403(b)(12)(A)(i));

(iii) A failure to satisfy the requirements

of § 401(a)(17) (as applied to 403(b) Plans

pursuant to § 403(b)(12)(A)(i));

(iv) A failure to satisfy the distribution

restrictions of § 403(b)(7) or § 403(b)(11);

(v) A failure to satisfy the incidental

death benefit rules of § 403(b)(10);

May 30, 2006 953 2006–22 I.R.B.



(vi) A failure to pay minimum required

distributions under § 403(b)(10);

(vii) A failure to give employees the

right to elect a direct rollover under

§ 403(b)(10), including the failure to

give meaningful notice of such right;

(viii) A failure of the annuity contract

or custodial agreement to provide partici-

pants with a right to elect a direct rollover

under §§ 403(b)(10) and 401(a)(31);

(ix) A failure to satisfy the limit on elec-

tive deferrals under § 403(b)(1)(E);

(x) A failure of the annuity contract or

custodial agreement to provide the limit

on elective deferrals under §§ 403(b)(1)(E)

and 401(a)(30);

(xi) A failure involving contributions or

allocations of Excess Amounts; or

(xii) Any other failure to satisfy appli-

cable requirements under § 403(b) that (A)

results in the loss of § 403(b) status for the

planor the lossof § 403(b)status for one or more custodial account(s) or annuity con-

tract(s) under the plan and (B) is not a De-

mographic Failure, an Employer Eligibil-

ity Failure, or a failure related to contribu-

tions on behalf of individuals who are not

employees of the employer.

(b) Demographic Failure. The

term “Demographic Failure” means a

failure to satisfy the requirements of

§ 401(a)(4), § 401(a)(26), or § 410(b)

(as applied to 403(b) Plans pursuant to

§ 403(b)(12)(A)(i)).

(c) Employer Eligibility Failure. Theterm “Employer Eligibility Failure” means

any of the following:

(i) The adoption of a plan intended to

satisfy the requirements of § 403(b) by a

Plan Sponsor that is not a tax-exempt or-

ganization described in § 501(c)(3) or a

public educational organization described

in § 170(b)(1)(A)(ii);

(ii) A failure to satisfy the nontransfer-

ability requirement of § 401(g);

(iii) A failure to initially establish or

maintain a custodial account as required by

§ 403(b)(7); or (iv) A failure to purchase (initially or

subsequently) either an annuity contract

from an insurance company (unless grand-

fathered under Rev. Rul. 82–102, 1982–1

C.B. 62) or a custodial account from a

regulated investment company utilizing a

bank or an approved non-bank trustee/cus-

todian.

(3) Excess Amount . The term “Excess

Amount” means any amount returned to

ensure that the plan satisfies the require-

ments of § 401(a)(30), 415, or 403(b)(2)

(for plan years prior to January 1, 2002).

In addition, the term “Excess Amount” in-

cludes (for all plan years) any distribu-

tions required to ensure that the plan com-

plies with the applicable requirements of

§ 403(b).

(4) Maximum Payment Amount . The

term “Maximum Payment Amount”

means a monetary amount that is approx-

imately equal to the tax the Service could

collect as a result of the 403(b) Failure and

is the sum for the open taxable years of

the:

(a) additional income tax resulting from

income inclusion for employees or other

participants (Form 1040), including the

tax on distributions that have been rolled

over to other qualified trusts (as defined

in § 402(c)(8)(A)) or eligible retirement

plans (as defined in § 402(c)(8)(B)) (andany interest or penalties applicable to the

participants’ returns), and

(b) any other tax that results from a

403(b) Failure that would apply but for the

correction under this revenue procedure.

(5) Plan Sponsor . The term “Plan

Sponsor” means the employer that offers

a 403(b) Plan to its employees.

.03 Under Examination. (1) The term

“Under Examination” means: (a) a plan

that is under an Employee Plans exami-

nation (that is, an examination of a Form

5500 series or other Employee Plans ex-amination); (b) a Plan Sponsor that is un-

der an Exempt Organizations examination

(that is, an examination of a Form 990 se-

ries or other Exempt Organizations exam-

ination); or (c) a plan that is under investi-

gation by the Criminal Investigation Divi-

sion of the Internal Revenue Service.

(2) A plan that is under an Employee

Plans examination includes any plan for

which the Plan Sponsor, or a represen-

tative, has received verbal or written

notification from Employee Plans of an

impending Employee Plans examina-tion, or of an impending referral for an

Employee Plans examination, and also

includes any plan that has been under an

Employee Plans examination and is now

in Appeals or in litigation for issues raised

in an Employee Plans examination. A plan

is considered to be Under Examination if

it is aggregated for purposes of satisfy-

ing the nondiscrimination requirements of

§ 401(a)(4), the minimum participation

requirements of § 401(a)(26), the mini

mum coverage requirements of § 410(b)

or the requirements of § 403(b)(12), wit

a plan(s) that is Under Examination. I

addition, a plan is considered to be Unde

Examination with respect to a failure of

qualification requirement (other than thos

described in the preceding sentence) if th

plan is aggregated with another plan fo

purposes of satisfying that qualificatio

requirement (for example, § 401(a)(30

§ 415, or § 416) and that other plan i

Under Examination. For example, assum

Plan A has a § 415 failure, Plan A is ag

gregated with Plan B only for purposes o

§ 415, and Plan B is Under Examination

In this case, Plan A is considered to be Un

der Examination with respect to the § 41

failure. However, if Plan A has a failur

relating to the spousal consent rules unde

§ 417 or the vesting rules of § 411, Plan A

is not considered to be Under Examinatiowith respect to the § 417 or § 411 failure

For purposes of this revenue procedure

the term aggregation does not include con

sideration of benefits provided by variou

plans for purposes of the average benefit

test set forth in § 410(b)(2).

(3) An Employee Plans examinatio

also includes a case in which a Plan Spon

sor has submitted any Form 5300 serie

form and the Employee Plans agent noti

fies the Plan Sponsor, or a representative

of possible Qualification Failures, whethe

or not the Plan Sponsor is officially notified of an “examination.” This woul

include a case where, for example,

Plan Sponsor has applied for a determi

nation letter on plan termination, and a

Employee Plans agent notifies the Pla

Sponsor that there are partial termination

concerns. In addition, if, during the re

view process, the agent requests additiona

information that indicates the existence o

a Qualification Failure(s) not previousl

identified by the Plan Sponsor, the pla

is considered to be under an Employe

Plans examination. If, in such a casethe determination letter request under re

view is subsequently withdrawn, the plan

is nevertheless considered to be unde

an Employee Plans examination for pur

poses of eligibility under SCP and VCP

with respect to those issues raised by th

agent reviewing the determination lette

application. The fact that a Plan Sponso

voluntarily submits a determination lette

application does not constitute a voluntar

2006–22 I.R.B. 954 May 30, 200



identification of Qualification Failures to

the Service. In order to be eligible to per-

fect a determination letter application into

a VCP submission, the Plan Sponsor (or

the authorized representative) must iden-

tify each Qualification Failure, in writing,

to the reviewing agent beforethe agent rec-

ognizes the existence of the Qualification

Failure(s) or addresses the Qualification

Failure(s) in communications with the

Plan Sponsor (or the authorized represen-

tative).

(4) A Plan Sponsor that is under an Ex-

empt Organizations examination includes

any Plan Sponsor that has received (or

whose representative has received) verbal

or written notification from Exempt Orga-

nizations of an impending Exempt Organi-

zations examination or of an impending re-

ferral for an Exempt Organizations exami-

nation and also includes any Plan Sponsor

that has been under an Exempt Organiza-tions examination and is now in Appeals or

in litigation for issues raised in an Exempt

Organizations examination.

.04 SEP. The term “SEP” means a plan

intended to satisfy the requirements of

§ 408(k). For purposes of this revenue

procedure, the term SEP also includes a

salary reduction SEP (“SARSEP”) de-

scribed in § 408(k)(6), when applicable.

.05 SIMPLE IRA Plan. The term

“SIMPLE IRA Plan” means a plan in-

tended to satisfy the requirements of

§ 408(p)..06 Definitions for Orphan Plans. (1)

Orphan Plan. With respect to VCP and

Audit CAP, the term “Orphan Plan” means

any Qualified Plan with respect to which

an “Eligible Party” (defined in section

5.06(2)) has determined that the Plan

Sponsor (a) no longer exists, (b) cannot be

located, (c) is unable to maintain the plan,

or (d) has abandoned the plan pursuant to

regulations issued by the Department of

Labor. However, the term “Orphan Plan”

does not include any plan terminated pur-

suant to Department of Labor regulationsgoverning the termination of abandoned

individual account plans.

(2) Eligible Party. For purposes of

section 5.06(1), the term “Eligible Party”

means:

(a) A court appointed representative

with authority to terminate the plan and

dispose of the plan’s assets;

(b) In the case of an Orphan Plan un-

der investigation by the Department of La-

bor, a person or entity who the Department

of Labor determined has accepted respon-

sibility for terminating the plan and dis-

tributing the plan’s assets; or

(c) In the case of a Qualified Plan to

which Title I of the Employee Retirement

Income Security Act of 1974 (“ERISA”)

has never applied, a surviving spouse who

is the sole beneficiary of a plan that pro-

vided benefits to a participant who was (i)

the sole owner of the business that spon-

sored the plan and (ii) the only participant

in the plan.

SECTION 6. CORRECTION

PRINCIPLES AND RULES OF

GENERAL APPLICABILITY

.01 Correction principles; rules of gen-

eral applicability. The general correction

principles in section 6.02 and rules of gen-

eral applicability in sections 6.03 through6.11 apply for purposes of this revenue

procedure.

.02 Correction principles. Generally, a

failure is not corrected unless full correc-

tion is made with respect to all participants

and beneficiaries, and for all taxable years

(whether or not the taxable year is closed).

Even if correction is made for a closed tax-

able year, the tax liability associated with

that year will not be redetermined because

of the correction. Correction is determined

taking into account the terms of the plan at

the time of the failure. Correction shouldbe accomplished taking into account the

following principles:

(1) Restoration of benefits. The correc-

tion method should restore the plan to the

position it would have been in had the fail-

ure not occurred, including restoration of

current and former participants and ben-

eficiaries to the benefits and rights they

would have had if the failure had not oc-

curred.

(2) Reasonable and appropriate correc-

tion. The correction should be reasonable

and appropriate for the failure. Depend-ing on the nature of the failure, there may

be more than one reasonable and appropri-

ate correction for the failure. For Quali-

fied Plans, any correction method permit-

ted under Appendix A or Appendix B is

deemed to be a reasonable and appropri-

ate method of correcting the related Qual-

ification Failure. Any correction method

permitted under Appendix A or Appendix

B applicable to a 403(b) Plan, a SEP, or a

SIMPLE IRA Plan is deemed to be a rea-

sonable and appropriate method of correct-

ing the related failure. Whether any other

particular correction method is reasonable

and appropriate is determined taking into

account the applicable facts and circum-

stances and the following principles:

(a) The correction method should, to the

extent possible, resemble one already pro-

vided for in the Code, regulations there-

under, or other guidance of general appli-

cability. For example, for Qualified Plans

and 403(b) plans, thecorrection method set

forth in § 1.402(g)–1(e)(2) would be the

typical means of correcting a failure under

§ 402(g).

(b) The correction method for failures

relating to nondiscrimination should pro-

vide benefits for nonhighly compensated

employees. For example, for Qualified

Plans, the correction method set forth in

§ 1.401(a)(4)–11(g) (rather than meth-ods making use of the special testing

provisions set forth in § 1.401(a)(4)–8

or § 1.401(a)(4)–9) would be the typ-

ical means of correcting a failure to

satisfy nondiscrimination requirements.

Similarly, the correction of a failure to

satisfy the requirements of § 401(k)(3),

§ 401(m)(2), or § 401(m)(9) (relating to

nondiscrimination), solely by distributing

excess amounts to highly compensated

employees would not be the typical means

of correcting such a failure.

(c) The correction method should keepplan assets in the plan, except to the extent

the Code, regulations, or other guidance

of general applicability provide for correc-

tion by distribution to participants or bene-

ficiaries or return of assets to the employer

or Plan Sponsor. For example, if an ex-

cess allocation (not in excess of the § 415

limits) made under a Qualified Plan was

made for a participant under a plan (other

than a cash or deferred arrangement), the

excess should be reallocated to other par-

ticipants or, depending on the facts and

circumstances, used to reduce future em-ployer contributions.

(d) The correction method should not

violate another applicable specific require-

ment of § 401(a) or § 403(b) (for example,

§ 401(a)(4), § 411(d)(6), or § 403(b)(12),

as applicable), § 408(k) for SEPs, or

§ 408(p) for SIMPLE IRA Plans, or a par-

allel requirement in Part 2 of Subtitle B of

Title I of ERISA (for plans that are subject

to Subtitle B of Part 2 of Title I of ERISA).

May 30, 2006 955 2006–22 I.R.B.



If an additional failure is created as a re-

sult of the use of a correction method in

this revenue procedure, then that failure

also must be corrected in conjunction with

the use of that correction method and in

accordance with the requirements of this

revenue procedure.

(3) Consistency requirement . Gen-

erally, where more than one correction

method is available to correct a type of

Operational Failure for a plan year (or

where there are alternative ways to apply a

correction method), the correction method

(or one of the alternative ways to apply

the correction method) should be applied

consistently in correcting all Operational

Failures of that type for that plan year.

Similarly, earnings adjustment methods

generally should be applied consistently

with respect to corrective contributions or

allocations for a particular type of Opera-

tional Failure for a plan year. In the caseof a Group Submission, the consistency

requirement applies on a plan by plan ba-

sis.

(4) Principles regarding corrective al-

locations and corrective distributions. The

following principles apply where an ap-

propriate correction method includes the

use of corrective allocations or corrective

distributions:

(a) Corrective allocations under a de-

fined contribution plan should be based

upon the terms of the plan and other appli-

cable information at the time of the failure(including the compensation that would

have been used under the plan for the pe-

riod with respect to which a corrective al-

location is being made) and should be ad-

justed for earnings (including losses) and

forfeitures that would have been allocated

to the participant’s account if the failure

had not occurred. However, the corrective

allocation need not be adjusted for losses.

See section 3 of Appendix B for additional

information on calculation of earnings for

corrective allocations.

(b) A corrective allocation to a partici-pant’s account because of a failure to make

a required allocation in a prior limitation

year will not be considered an annual addi-

tion with respect to the participant for the

limitation year in which the correction is

made, but will be considered an annual ad-

dition for the limitation year to which the

corrective allocation relates. However, the

normal rules of § 404, regarding deduc-

tions, apply.

(c) Corrective allocations should come

only from employer contributions (includ-

ing forfeitures if the plan permits their use

to reduce employer contributions).

(d) In the case of a defined benefit plan,

a corrective distribution for an individual

should be increased to take into account

the delayed payment, consistent with the

plan’s actuarial adjustments.

(5) Special exceptions to full correc-

tion. In general, a failure must be fully

corrected. Although the mere fact that cor-

rection is inconvenient or burdensome is

not enough to relieve a Plan Sponsor of the

need to make full correction, full correc-

tion may not be required in certain situa-

tions because it is unreasonable or not fea-

sible. Even in these situations, the correc-

tion method adopted must be one that does

not have significant adverse effects on par-

ticipants and beneficiaries or the plan, and

that does not discriminate significantly infavor of highly compensated employees.

The exceptions described below specify

those situations in which full correction is

not required.

(a) Reasonable estimates. If either, (i)

it is possible to make a precise calculation

but theprobable difference between theap-

proximate and the precise restoration of a

participant’s benefits is insignificant and

the administrative cost of determining pre-

cise restoration would significantly exceed

the probable difference or (ii) it is not pos-

sible to make a precise calculation (for ex-ample, where it is impossible to provide

plan data), reasonable estimates may be

used in calculating appropriate correction.

If it is not feasible to make a reasonable

estimate of what the actual investment re-

sults would have been, a reasonable inter-

est rate may be used.

(b) Delivery of small benefits. If the to-

tal corrective distribution due a participant

or beneficiary is $50 or less, the Plan Spon-

sor is not required to make the corrective

distribution if the reasonable direct costs

of processing and delivering the distribu-tion to the participant or beneficiary would

exceed the amount of the distribution. This

section 6.02(5)(b) does not apply to correc-

tive contributions.

(c) Recovery of small Overpayments.

Generally, under VCP or Audit CAP, if

the total amount of an Overpayment made

to a participant or beneficiary is $100 or

less, the Plan Sponsor is not required to

seek the return of the Overpayment from

the participant or beneficiary. The Pla

Sponsor is not required to notify the par

ticipant or beneficiary that the Overpay

ment is not eligible for favorable tax treat

ment accorded to distributions from Quali

fied Plans (and, specifically, is not eligibl

for tax-free rollover).

(d) Locating lost participants. Reason

able actions must be taken to find all cur

rent and former participants and beneficia

ries to whom additional benefits are due

but who have not been located after a mail

ing to the last known address. In genera

such actions include use of the Interna

Revenue Service Letter Forwarding Pro

gram (see Rev. Proc. 94–22, 1994–1 C.B

608) or the Social Security Administratio

Employer Reporting Service. A plan wi

not be considered to have failed to correc

a failure due to the inability to locate an in

dividual if either of these programs is used

provided that, if the individual is later located, the additional benefits are provide

to the individual at that time. The Interna

Revenue Service Letter Forwarding Pro

gram may not be used to locate partici

pants in order to collect amounts owed t

the plan.

(e) Small Excess Amounts. Generally

under VCP or Audit CAP, if the tota

amount of an Excess Amount with respec

to the benefit of a participant or benefi

ciary is $100 or less, the Plan Sponsor i

not required to distribute or forfeit such

Excess Amount. However, if the ExcesAmount exceeds a statutory limit, th

participant or beneficiary must be noti

fied that the Excess Amount, includin

earnings, is not eligible for favorable ta

treatment accorded to distributions from

Qualified Plans (and, specifically, is no

eligible for tax-free rollover). See sectio

6.06(1) for such notice requirements.

(f) Orphan Plans. The Service retain

the discretion to determine under VCP an

Audit CAP whether full correction will b

required in a terminating Orphan Plan.

(6) Correction principle for loan faiures. In the case of a loan failure correcte

in accordance with section 6.07(2)(b) o

(c) and section 6.07(3), the participant i

generally responsible for paying the cor

rective payment. However, with respec

to the failure listed in section 6.07(3), th

employer should pay a portion of the cor

rection payment on behalf of the partici

pant equal to the interest that accumulate

as a result of such failure — generally de

2006–22 I.R.B. 956 May 30, 200



termined at a rate equal to the greater of the

plan loan rate or the rate of return under the

plan.

(7) Correction for exclusion of employ-

ees for elective contributions or after-tax

employee contributions. If a Qualified

Plan has an Operational Failure that con-

sists of excluding an employee that should

have been eligible to make an elective

contribution under a cash or deferred

arrangement or an after-tax employee con-

tribution, the employer should contribute

to the plan on behalf of the excluded

employee an amount that makes up for

the value of the lost opportunity to the

employee to have a portion of his or her

compensation contributed to the plan ac-

cumulated with earnings tax free in the

future. This correction principle applies

solely to this limited circumstance. It does

not, for example, extend to the correction

of a failure to satisfy a nondiscrimina-tion test, e.g., the ADP test pursuant to

§ 401(k)(3) and the ACP test pursuant

to § 401(m)(2). Specific methods and

examples to correct this failure are pro-

vided in Appendix A .05 and Appendix B

2.02. Similarly, the methods and exam-

ples provided for correcting this failure

do not extend to other failures. Thus, the

correction methods and the examples in

Appendix A .05 and Appendix B 2.02

cannot, for example, be used to correct

ADP/ACP failures. Finally, the methods

and examples do not address situationswhere an employee was excluded from a

plan that provided for the opportunity to

make designated Roth contributions.

(8) Reporting. Any corrective distribu-

tions from the plan should be properly re-

ported.

.03 Correction of an Employer Eligi-

bility Failure. (1) The permitted correc-

tion of an Employer Eligibility Failure is

the cessation of all contributions (includ-

ing salary reduction and after-tax contri-

butions) beginning no later than the date

the application under VCP is filed. Pur-suant to VCP correction, the assets in such

a plan are to remain in the trust, annuity

contract, or custodial account and are to be

distributed no earlier than the occurrence

of one of theapplicable distribution events,

e.g., for 403(b) Plans, the events described

in § 403(b)(7) (to the extent the assets are

held in custodial accounts) or § 403(b)(11)

(for those assets invested in annuity con-

tracts that would be subject to § 403(b)(11)

restrictions if the employer were eligible).

(2) Cessation of contributions is not

required if continuation of contributions

would not be an Employer Eligibility

Failure (for example, with respect to a

tax-exempt employer that may maintain a

§ 401(k) plan after 1996).

(3) A plan that is corrected through

VCP is treated as subject to all of the re-

quirements and provisions of § 401(a) for

a Qualified Plan, § 403(b) for a 403(b)

Plan, § 408(k) for a SEP, and § 408(p)

for a SIMPLE IRA Plan (including Code

provisions relating to rollovers). There-

fore, the Plan Sponsor must also correct

all other failures in accordance with this

revenue procedure.

.04 Correction of a failure to obtain

spousal consent . (1) Normally, the correc-

tion method under VCP for a failure to ob-

tain spousal consent for a distribution thatis subject to the spousal consent rules un-

der §§ 401(a)(11) and 417 is similar to the

correction method described in Appendix

A .07. The Plan Sponsor must notify the

affected participant and spouse (to whom

the participant was married at the time of

the distribution), so that the spouse can

provide spousal consent to the distribution

actually made or the participant may re-

pay the distribution and receive a qualified

joint and survivor annuity.

(2)(a) As alternatives to the correction

method in section 6.04(1), correction for a failure to obtain spousal consent may

be made under either section 6.04(2)(b) or

section 6.04(2)(c).

(b) In the event that spousal consent to

the prior distribution is not obtained (e.g.,

because the spouse chooses not to con-

sent, the spouse does not respond to the

notice, or the spouse cannot be located),

the spouse is entitled to a benefit under the

plan equal to the portion of the qualified

joint and survivor annuity that would have

been payable to the spouse upon the death

of the participant had a qualified joint andsurvivor annuity been provided to the par-

ticipant under the plan at the annuity start-

ing date for the prior distribution. Such

spousal benefit must be provided if a claim

is made by the spouse.

(c) In the event that spousal consent

to the prior distribution is not obtained,

the plan may offer the spouse the choice

between (i) the survivor annuity benefit

described in section 6.04(2)(b) or (ii) a

single-sum payment equal to the actuar-

ial present value of that survivor annu-

ity benefit (calculated using the applica-

ble interest rate and mortality table under

§ 417(e)(3)). Any such single-sum pay-

ment is treated in the same manner as a dis-

tribution under § 402(c)(9) for purposes of

rolling over the payment to an IRA or other

eligible retirement plan.

.05 Correction by plan amendment . In

a case in which correction of a Qualifica-

tion Failure includes correction of a Plan

Document Failure, Demographic Failure,

or Operational Failure by plan amendment,

a determination letter application may be

required. See section 4.06.

.06 Special rules relating to Ex-

cess Amounts. (1) Treatment of Excess

Amounts under Qualified Plans. Except as

otherwise provided in section 6.02(5)(c),

a distribution of an Excess Amount is not

eligible for the favorable tax treatmentaccorded to distributions from Qualified

Plans (such as eligibility for rollover under

§ 402(c)). Thus, for example, if such a

distribution was contributed to an individ-

ual retirement arrangement (“IRA”), the

contribution is not a valid rollover con-

tribution for purposes of determining the

amount of excess contributions (within

the meaning of § 4973) to the individual’s

IRA. A distribution of an Excess Amount

is generally treated in the manner de-

scribed in section 3 of Rev. Proc. 92–93,

1992–2 C.B. 505, relating to the correctivedisbursement of elective deferrals. The

distribution must be reported on Forms

1099–R for the year of distribution with

respect to each participant or beneficiary

receiving such a distribution. Except as

otherwise provided in section 6.02(5)(c),

where an Excess Amount has been or is

being distributed, the Plan Sponsor must

notify the recipient that (a) an Excess

Amount has been or will be distributed

and (b) an Excess Amount is not eligible

for favorable tax treatment accorded to

distributions from Qualified Plans (and,specifically, is not eligible for tax-free

rollover).

(2) Treatment of Excess Amounts under

403(b) Plans. The distribution of Excess

Amounts is not an eligible rollover distri-

bution within the meaning of § 403(b)(8).

A distribution of Excess Amounts is gen-

erally treated in the manner described in

section 3 of Rev. Proc. 92–93 relating

to the corrective disbursement of elec-

May 30, 2006 957 2006–22 I.R.B.



tive deferrals. The distribution must be

reported on Forms 1099–R for the year

of distribution with respect to each par-

ticipant or beneficiary receiving such a

distribution. Except as otherwise provided

in section 6.02(5)(c), where an Excess

Amount has been or is being distributed,

the Plan Sponsor must notify the recipient

that (a) an Excess Amount has been or will

be distributed and (b) an Excess Amount

is not eligible for favorable tax treatment

accorded to distributions from Qualified

Plans (and, specifically, is not eligible for

tax-free rollover).

.07 Rules relating to reporting plan

loan failures. (1) General rule for loans.

Unless correction is made in accordance

with this section 6.07(2) or (3), a deemed

distribution under § 72(p)(1) in connec-

tion with a failure relating to a loan to a

participant made from a Qualified Plan or

a 403(b) Plan must be reported on Form1099–R with respect to the affected par-

ticipant and any applicable income tax

withholding amount that was required to

be paid in connection with the failure (see

§ 1.72(p)–1, Q&A–15) must be paid by

the employer. As part of VCP, the deemed

distribution may be reported on Form

1099–R with respect to the affected par-

ticipant for the year of correction (instead

of the year of the failure).

(2) Special rules for loans. (a) In gen-

eral. The correction methods set forth in

this section 6.07(2) (b) and (c) and sec-tion 6.07(3) are only available for plan

loan failures that are corrected through

VCP. The correction methods described

in section 6.07(2) (b) and (c) and section

6.07(3) are not available if the maximum

period for repayment of the loan pursuant

to § 72(p)(2)(B) has expired. The Ser-

vice reserves the right to limit the use of

the correction methods listed in section

6.07(2) (b) and (c) and section 6.07(3) to

situations that it considers appropriate; for

example, where the loan failure is caused

by employer action. A deemed distribu-tion corrected under section 6.07(2) (b) or

(c) or under section 6.07(3) is not required

to be reported on Form 1099–R and repay-

ments made by correction under sections

6.07(2) and 6.07(3) do not result in the af-

fected participant having additional basis

in the plan for purposes of determining the

tax treatment of subsequent distributions

from the plan to the affected participant.

(b) Loans in excess of § 72(p)(2)(A).

A failure to comply with plan provi-

sions requiring that loans comply with

§ 72(p)(2)(A) may be corrected by a cor-

rective repayment to the plan based on the

excess of the loan amount over the max-

imum loan amount under § 72(p)(2)(A).

In the event that loan repayments were

made in accordance with the amortization

schedule for the loan before correction,

such prior repayments may be applied (i)

solely to reduce the portion of the loan that

did not exceed the maximum loan amount

under § 72(p)(2)(A) (so that the correc-

tive repayment would equal the original

loan excess plus interest thereon), (ii) to

reduce the loan excess to the extent of the

interest thereon, with the remainder of the

repayments applied to reduce the portion

of the loan that did not exceed the maxi-

mum loan amount under § 72(p)(2)(A) (so

that the corrective repayment would equalthe original loan excess), or (iii) pro rata

against the loan excess and the maximum

loan amount under § 72(p)(2)(A) (so that

the corrective repayment would equal the

outstanding balance remaining on the orig-

inal loan excess on the date that corrective

repayment is made). After the correc-

tive payment is made, the loan may be

reformed to amortize the remaining prin-

cipal balance as of the date of repayment

over the remaining period of the original

loan. This is permissible as long as the

recalculated payments over the remainingperiod would not cause the loan to violate

the maximum duration permitted under

§ 72(p)(2)(B). The maximum duration is

determined from the date the original loan

was made. In addition, the amortization

payments determined for the remaining

period must comply with the level amorti-

zation requirements of § 72(p)(2)(C).

(c) Loan terms that do not satisfy

§ 72(p)(2)(B) or (C). For a failure of

loan repayment terms to provide for a

repayment schedule that complies with

§ 72(p)(2)(B) or (C), the failure may becorrected by a reamortization of the loan

balance in accordance with § 72(p)(2)(C)

over the remaining period that is the

maximum period that complies with

§ 72(p)(2)(B) measured from the origi-

nal date of the loan.

(3) Defaulted loans. A failure to re-

pay the loan in accordance with the loan

terms where the terms satisfy § 72(p)(2)

may be corrected by (i) a lump sum repay-

ment equal to the additional repayment

that the affected participant would hav

made to the plan if there had been no fail

ure to repay the plan, plus interest accrue

on the missed repayments, (ii) reamortiz

ing the outstanding balance of the loan, in

cluding accrued interest, over the remain

ing payment schedule of the original term

of the loan, or (iii) any combination of (i

or (ii).

.08 Correction under statute or regula

tions. Generally, none of the correctio

programs are available to correct failure

that can be corrected under the Code an

related regulations. For example, as a gen

eral rule, a Plan Document Failure that i

a disqualifying provision for which the re

medial amendment period under § 401(b

has not expired can be corrected by opera

tion of the Code through retroactive reme

dial amendment.

.09 Matters subject to excise taxes. (1Except as provided in this revenue proce

dure, thecorrection programs are notavail

able for events for which the Code pro

vides tax consequences other than plan dis

qualification (such as the imposition of a

excise tax or additional income tax). Fo

example, funding deficiencies (failures t

make the required contributions to a pla

subject to § 412), prohibited transactions

and failures to file the Form 5500 can

not be corrected under the correction pro

grams.

(2) As part of VCP and Audit CAPif the failure involves the failure to sat

isfy the minimum required distribution re

quirements of § 401(a)(9), in appropriat

cases, the Service will waive the excis

tax under § 4974 applicable to plan par

ticipants. The waiver will be included i

the compliance statement or in the clos

ing agreement in the case of Audit CAP

The Plan Sponsor, as part of the submis

sion, must request the waiver and in case

where the participant subject to the excis

tax is an owner-employee, as defined i

§ 401(c)(3), or a 10 percent owner of corporation, the Plan Sponsor must als

provide an explanation supporting the re

quest. See section 12.02(2) relating t

the applicable compliance fee for certain

§ 401(a)(9) failures.

(3) As part of VCP, if the failure in

volves a correction that requires the Pla

Sponsor to make a plan contribution tha

is not deductible, in appropriate cases, th

Service will not pursue the excise tax un

2006–22 I.R.B. 958 May 30, 200



der § 4972 on such nondeductible contri-

butions. The Plan Sponsor, as part of the

submission must request the relief and pro-

vide an explanation supporting the request.

(4) As part of VCP, if a failure re-

sults in excess contributions as defined

in §4979(c) or excess aggregate contribu-

tions as defined in §4979(d) under a plan,

the Service will not pursue the excise tax

under § 4979 in appropriate cases, e.g.,

where correction is made for any case in

which the ADP test was timely performed

but, due to reliance on inaccurate data,

resulted in an insufficient amount of ex-

cess elective contributions having been

distributed to HCEs. The Plan Sponsor, as

part of the submission, must request the

relief and provide an explanation support-

ing the request.

.10 Correction for SEPs and SIMPLE

IRA Plans. (1) Correction for SEPs and

SIMPLE IRA Plans generally. Generally,the correction for a SEP or a SIMPLE

IRA Plan is expected to be similar to the

correction required for a Qualified Plan

with a similar Qualification Failure (i.e.,

Plan Document Failure, Operational Fail-

ure, Demographic Failure and Employer

Eligibility Failure).

(2) Special correction for SEPs and

SIMPLE IRA Plans. In any case in which

correction under section 6.10(1) is not fea-

sible for a SEP or SIMPLE IRA Plan or in

any other case determined by the Service

in its discretion (including failures relatingto §§ 402(g), 415, and 401(a)(17), failures

relating to deferral percentages, discon-

tinuance of contributions to a SARSEP

or SIMPLE IRA Plan, and retention of

Excess Amounts for cases in which there

has been no violation of a statutory limi-

tation with respect to a SEP or SIMPLE

IRA Plan), the Service may provide for a

different correction. See section 12.06(2)

for a special fee that may apply in such a

case.

(3) Correction of failure to satisfydefer-

ral percentage test . If the failure involvesa violation of the deferral percentage test

under § 408(k)(6)(A)(iii) applicable to a

SARSEP, the failure may be corrected in

either one of the following ways:

(a) The Plan Sponsor may make contri-

butions that are 100% vested to all eligi-

ble nonhighly compensated employees (to

the extent permitted by § 415) necessary

to raise the deferral percentage needed to

pass the test. This amount may be calcu-

lated as the same percentage of compensa-

tion (regardless of the terms of the SEP).

(b) The Plan Sponsor may effect dis-

tribution of excess contributions, adjusted

for earnings through the date of correc-

tion, to highly compensated employees

to correct the failure. The Plan Sponsor

must also contribute to the SEP an amount

equal to the total amount distributed. This

amount must be allocated to (i) current

employees who were nonhighly compen-

sated employees in the year of the failure,

(ii) current nonhighly compensated em-

ployees who were nonhighly compensated

employees in the year of the failure, or (iii)

employees (both current and former) who

were nonhighly compensated employees

in the year of the failure.

(4) Treatment of undercontributions

to a SEP or a SIMPLE IRA Plan. (a)

Make-up contributions; earnings. The

Plan Sponsor should correct undercontri-butions to a SEP or a SIMPLE IRA Plan

by contributing make-up amounts that are

fully vested, adjusted for earnings credited

from the date of the failure to the date of

correction.

(b) Earnings adjustment methods. In-

sofar as SEP and SIMPLE IRA Plan assets

are held in IRAs, there is no earnings rate

under the SEP or SIMPLE IRA Plan as a

whole. If it is not feasible to make a rea-

sonable estimate of what the actual invest-

ment results would have been, a reasonable

interest rate may be used.(5) Treatment of Excess Amounts under

a SEP or a SIMPLE IRA Plan. (a) Distri-

bution of Excess Amounts. For purposes

of section 6.10, an Excess Amount is an

amount contributed on behalf of an em-

ployee that is in excess of an employee’s

benefit under the plan, or an elective defer-

ral in excess of the limitations of §§ 402(g)

or 408(k)(6)(A)(iii). If an Excess Amount

is attributable to elective deferrals, the

Plan Sponsor may effect distribution of

the Excess Amount, adjusted for earnings

through the date of correction, to the af-fected participant. The amount distributed

to the affected participant is includible

in gross income in the year of distribu-

tion. The distribution is reported on Form

1099–R for the year of distribution with

respect to each participant receiving the

distribution. In addition, the Plan Spon-

sor must inform affected participants that

the distribution of an Excess Amount is

not eligible for favorable tax treatment

accorded to distributions from a SEP or

a SIMPLE IRA Plan (and, specifically, is

not eligible for tax-free rollover). If the

Excess Amount is attributable to employer

contributions, the Plan Sponsor may ef-

fect distribution of the employer Excess

Amount, adjusted for earnings through the

date of correction, to the Plan Sponsor.

The amount distributed to the Plan Spon-

sor is not includible in the gross income of

the affected participant. The Plan Sponsor

is not entitled to a deduction for such em-

ployer Excess Amount. The distribution

is reported on Form 1099–R issued to the

participant indicating the taxable amount

as zero.

(b) Retention of Excess Amounts. If an

Excess Amount is retained in the SEP or

SIMPLE IRA Plan under section 6.10(5), a

special fee, in addition to the VCP submis-

sion fee, will apply. See section 12.05(2)

for the special fee. The Plan Sponsor isnot entitled to a deduction for an Excess

Amount retained in the SEP or SIMPLE

IRA Plan. In the case of an Excess Amount

retained in a SEP that is attributable to a

§ 415 failure, the Excess Amount, adjusted

for earnings through the date of correction,

must reduce affected participants’ applica-

ble § 415 limit for the year following the

year of correction (or for the year of cor-

rection if the Plan Sponsor so chooses),

and subsequent years, until the excess is

eliminated.

(c) De minimis Excess Amounts. If thetotal Excess Amount in a SEP or SIMPLE

IRA Plan, whether attributable to elec-

tive deferrals or employer contributions,

is $100 or less, the Plan Sponsor is not

required to distribute the Excess Amount

and the special fee described in section

12.05(2) does not apply.

.11 Confidentiality and disclosure. Be-

cause each correction program relates di-

rectly to the enforcement of the Code qual-

ification requirements, the information re-

ceived or generated by the Service under

the program is subject to the confidential-ity requirements of § 6103 and is not a

written determination within the meaning

of § 6110.

.12 No effect on other law. Correction

under these programs has no effect on the

rights of any party under any other law, in-

cluding Title I of ERISA. The Department

of Labor maintains a Voluntary Fiduciary

Correction Program under which certain

ERISA fiduciary violations may be cor-

May 30, 2006 959 2006–22 I.R.B.



rected. The Department of Labor also

maintains a Delinquent Filer Voluntary

Compliance Program under which certain

failures to comply with the annual report-

ing requirements (Form 5500 series) under

ERISA may be corrected.

PART IV. SELF-CORRECTION (SCP)

SECTION 7. IN GENERAL

The requirements of this section 7 are

satisfied with respect to an Operational

Failure if the Plan Sponsor of a Qualified

Plan, a 403(b) Plan, a SEP, or a SIMPLE

IRA Plan satisfies the requirements of sec-

tion 8 (relating to insignificant Operational

Failures) or, in the case of a Qualified Plan

or a 403(b) Plan, section 9 (relating to sig-

nificant Operational Failures).

SECTION 8. SELF-CORRECTION

OF INSIGNIFICANT OPERATIONAL

FAILURES

.01 Requirements. The requirements of

this section 8 are satisfied with respect to

an Operational Failure if the Operational

Failure is corrected and, given all the facts

and circumstances, the Operational Failure

is insignificant. This section 8 is available

for correcting an insignificant Operational

Failure even if the plan or Plan Sponsor is

Under Examination and even if the Oper-

ational Failure is discovered on examina-tion.

.02 Factors. The factors to be consid-

ered in determining whether or not an Op-

erational Failure under a plan is insignif-

icant include, but are not limited to: (1)

whether other failures occurred during the

period being examined (for this purpose, a

failure is not considered to have occurred

more than once merely because more than

one participant is affected by the failure);

(2) the percentage of plan assets and con-

tributions involved in the failure; (3) the

number of years the failure occurred; (4)the number of participants affected rela-

tive to the total number of participants in

the plan; (5) the number of participants af-

fected as a result of the failure relative to

the number of participants who could have

been affected by the failure; (6) whether

correction was made within a reasonable

time after discovery of the failure; and (7)

the reason for the failure (for example, data

errors such as errors in the transcription

of data, the transposition of numbers, or

minor arithmetic errors). No single factor

is determinative. Additionally, factors (2),

(4), and (5) should not be interpreted to ex-

clude small businesses.

.03 Multiple failures. In the case of a

plan with more than one Operational Fail-

ure in a single year, or Operational Failures

that occur in more than one year, the Oper-

ational Failures are eligible for correction

under this section 8 only if all of the Op-

erational Failures are insignificant in the

aggregate. Operational Failures that have

been corrected under SCP in section 9 and

VCP in sections 10 and 11 are not taken

into account for purposes of determining

if Operational Failures are insignificant in

the aggregate.

.04 Examples. The following examples

illustrate the application of this section 8.

It is assumed, in each example, that the el-igibility requirements of section 4 relating

to SCP have been satisfied and that no Op-

erational Failures occurred other than the

Operational Failures identified below. Example 1: In1991,EmployerX establishedPlan

A, a profit-sharing plan that satisfies therequirements

of § 401(a) in form. In 2003, the benefits of 50 of the

250 participants in Plan A were limited by § 415(c).

However,whenthe ServiceexaminedPlanA in 2006,

it discovered that, during the 2003 limitation year,

the annual additions allocated to the accounts of 3 of

these employees exceeded the maximum limitations

under § 415(c). Employer X contributed $3,500,000

to the plan for the plan year. The amount of the ex-

cesses totaled $4,550. Under these facts, because thenumber of participants affected by the failure relative

to the total number of participants who could have

been affected by thefailure, andthe monetary amount

of the failure relative to the total employer contribu-

tion to the plan for the 2003 plan year, are insignif-

icant, the § 415(c) failure in Plan A that occurred in

2003 would be eligible for correction under this sec-

tion 8.

Example 2: The facts are the same as in Example

1, except that the failure to satisfy § 415 occurred

during each of the 2003, 2004, and 2005 limitation

years. In addition, the three participants affected by

the § 415 failure were not identical each year. The

fact that the § 415 failures occurred during more than

one limitation year did not cause the failures to besignificant; accordingly, the failures are still eligible

for correction under this section 8.

Example 3: The facts are the same as in Exam-

ple 1, except that the annual additions of 18 of the 50

employees whose benefits were limited by § 415(c)

nevertheless exceeded the maximum limitations un-

der § 415(c) during the 2003 limitation year, and the

amount of theexcesses rangedfrom$1,000 to $9,000,

and totaled $150,000. Under these facts, taking into

account the number of participants affected by the

failurerelative to thetotal numberof participants who

could have been affected by the failure for the 200

limitation year (and the monetary amount of the fai

ure relative to the total employer contribution), th

failure is significant. Accordingly, the § 415(c) fai

ure in Plan A that occurred in 2003 is ineligible fo

correction underthis section 8 as an insignificant fai

ure.

Example 4: Employer J maintains Plan C,

money purchase pension plan established in 1992

The plan document satisfies the requirements o

§ 401(a) of the Code. The formula under the plaprovides for an employer contribution equal to 10%

of compensation, as defined in the plan. Durin

its examination of the plan for the 2004 plan year

the Service discovered that the employee responsi

ble for entering data into the employer’s compute

made minor arithmetic errors in transcribing th

compensation data with respect to 6 of the plan’s 4

participants, resulting in excess allocations to those

participants’ accounts. Under these facts, the numbe

of participants affected by the failure relative to th

number of participants that could have been affecte

is insignificant, and the failure is due to minor dat

errors. Thus, the failure occurring in 2004 woul

be insignificant and therefore eligible for correctio

under this section 8.

Example 5: Public School maintains for its 20

employees a salaryreduction403(b) Plan (the“Plan”

that satisfies the requirements of § 403(b). The bus

ness manager has primary responsibility for admin

istering the Plan, in addition to other administrativ

functions withinPublic School. During the 2004pla

year, a former employee should have received an ad

ditional minimum required distribution of $278 un

der § 403(b)(10). Another participant received an im

permissible hardship withdrawal of $2,500. Anothe

participant made elective deferrals of which $1,00

was in excess of the § 402(g) limit. Under thes

facts, even though multiple failures occurred in a sin

gle plan year, the failures will be eligible for correc

tion under this section 8 because in the aggregate th

failures are insignificant.

SECTION 9. SELF-CORRECTION

OF SIGNIFICANT OPERATIONAL

FAILURES

.01 Requirements. The requirements o

this section 9 are satisfied with respect to

an Operational Failure (even if significant

if the Operational Failure is corrected an

the correction is either completed or sub

stantially completed (in accordance wit

section 9.04) by the last day of the correc

tion period described in section 9.02..02 Correction period . (1) End of cor

rection period . The last day of the cor

rection period for an Operational Failur

is the last day of the second plan year fol

lowing the plan year for which the failur

occurred. However, in the case of a failur

to satisfy the requirements of § 401(k)(3)

401(m)(2), or 401(m)(9), the correctio

period does not end until the last day o

2006–22 I.R.B. 960 May 30, 200



the second plan year following the plan

year that includes the last day of the addi-

tional period for correction permitted un-

der § 401(k)(8) or 401(m)(6). If a 403(b)

Plan does not have a plan year, the plan

year is deemed to be the calendar year for

purposes of this subsection.

(2) Extension of correction period for

Transferred Assets. In the case of an Op-

erational Failure that relates only to Trans-

ferred Assets, or to a plan assumed in con-

nection with a corporate merger, acquisi-

tion or other similar employer transaction,

the correction period does not end until

the last day of the first plan year that be-

gins after the corporate merger, acquisi-

tion, or other similar employer transaction

between the Plan Sponsor and the sponsor

of the transferor plan or the prior sponsor

of an assumed plan.

(3) Effect of examination. The correc-

tion period for an Operational Failure thatoccurs for any plan year ends, in any event,

on the first date the plan or Plan Sponsor

is Under Examination for that plan year

(determined without regard to the second

sentence of section 9.02). (But see section

9.04 for special rules permitting comple-

tion of correction after the end of the cor-

rection period.)

.03 Correction by plan amendment .

In order to complete correction by plan

amendment (as permitted under section

4.05), the appropriate determination let-

ter application must be submitted beforethe end of the plan’s applicable remedial

amendment period described in Rev. Proc.

2005–66.

.04 Substantial completion of correc-

tion. Correction of an Operational Failure

is substantially completed by the last day

of the correction period only if the require-

ments of either paragraph (1) or (2) are sat-

isfied.

(1) The requirements of this paragraph

(1) are satisfied if:

(a) during the correction period, the

Plan Sponsor is reasonably prompt inidentifying the Operational Failure, formu-

lating a correction method, and initiating

correction in a manner that demonstrates

a commitment to completing correction of

the Operational Failure as expeditiously

as practicable, and

(b) within 90 days after the last day

of the correction period, the Plan Sponsor

completes correction of the Operational

Failure.

(2) The requirements of this paragraph

(2) are satisfied if:

(a) during the correction period, correc-

tion is completed with respect to 85 per-

cent of all participants affected by the Op-

erational Failure, and

(b) thereafter, the Plan Sponsor com-

pletes correction of the Operational Failure

with respect to the remaining affected par-

ticipants in a diligent manner.

.05 Examples. The following examples

illustrate the application of this section 9.

Assume that the eligibility requirements of

section 4 relating to SCP have been met. Example 1: Employer Z established a qualified

defined contribution plan in 2003 and received a

favorable determination letter. During 2005, while

doing a self-audit of the operation of the plan for the

2004 plan year, the plan administrator discovered

that, despite the practices and procedures established

by Employer Z with respect to the plan, several

employees eligible to participate in the plan were

excluded from participation. The administrator also

found that for 2004 Operational Failures occurredbecause the elective deferrals of additional employ-

ees exceeded the § 402(g) limit and Employer Z

failed to make the required top-heavy minimum

contribution. During the 2005 plan year, the Plan

Sponsor made corrective contributions on behalf

of the excluded employees, distributed the excess

deferrals to the affected participants, and made a

top-heavy minimum contribution to all participants

entitled to that contribution for the 2004 plan year.

Each corrective contribution and distribution was

credited with earnings at a rate appropriate for the

plan from the date the corrective contribution or

distribution should have been made to the date of

correction. Under these facts, the Plan Sponsor has

corrected the Operational Failures for the 2004 planyear within the correction period and thus satisfied

the requirements of this section 9.

Example 2: Employer A established a qualified

defined contribution plan, Plan A, in 1990 and has

received a favorable determination letter for the ap-

plicable law changes. In April 2003, Employer A

purchased all of the stock of Employer B, a wholly-

owned subsidiary of Employer C. Employees of Em-

ployer B participated in Plan C, a qualified defined

contribution plan sponsored by Employer C. Follow-

ing Employer A’s review of Plan C, Employer A and

Employer C agreed that Plan A would accept a trans-

fer of plan assets attributable to the account balances

ofthe employeesof Employer B whohad participated

in Plan C. As part of this agreement, Employer C rep-

resented to Employer A that Plan C is tax qualified.

Employers A and C also agreed that such transfer

would bein accordancewith§ 414(l)and § 1.414(l)–1

and addressed issues related to costs associated with

the transfer. Following the transaction, the employ-

ees of Employer B began participation in Plan A. Ef-

fective July 1, 2003, Plan A accepted the transfer

of plan assets from Plan C. After the transfer, Em-

ployerA determined that allthe participants in onedi-

vision of Employer B had been incorrectly excluded

from allocation of the profit sharing contributions for

the 1998 and 1999 plan years. During 2004, Em-

ployer A made corrective contributions on behalf of

the affected participants. The corrective contribu-

tions were credited with earnings at a rate appropri-

ate for the plan from the date the corrective contri-

bution should have been made to the date of correc-

tion and Employer A otherwise complied with the re-

quirements of SCP. Under these facts, Employer A

has, within the correction period, corrected the Op-

erational Failures for the 1998 and 1999 plan years

with respect to the assets transferred to Plan A, and

thus satisfied the requirements of this section 9.

PART V. VOLUNTARY CORRECTION

PROGRAM WITH SERVICE

APPROVAL (VCP)

SECTION 10. VCP PROCEDURES

.01 VCP requirements. The require-

ments of this section 10 are satisfied with

respect to failures submitted in accordance

with the requirements of this section 10

if the Plan Sponsor pays the compliance

fee required under section 12 and imple-

ments the corrective actions and satisfiesany other conditions in the compliance

statement described in section 10.08.

.02 Identification of failures. VCP is

not based upon an examination of the plan

by the Service. Only the failures raised

by the Plan Sponsor or failures identified

by the Service in processing the applica-

tion are addressed under VCP, and only

those failures will be covered by the VCP

compliance statement. The Service will

not make any investigation or finding un-

der VCP concerning whether there are fail-

ures..03 Effect of VCP submission on exam-

ination. Because VCP does not arise out

of an examination, consideration under

VCP does not preclude or impede (under

§ 7605(b) or any administrative provisions

adopted by the Service) a subsequent ex-

amination of the Plan Sponsor or the plan

by the Service with respect to the taxable

year (or years) involved with respect to

matters that are outside the compliance

statement. However, a Plan Sponsor’s

statements describing failures are made

only for purposes of VCP and will not be

regarded by the Service as an admission

of a failure for purposes of any subsequent

examination. See section 5.03 for the def-

inition of Under Examination.

.04 No concurrent examination activ-

ity. Except in unusual circumstances, a

plan that has been properly submitted un-

der VCP will not be examined while the

submission is pending. Notwithstanding

the above, a plan thatis eligible for a Group

May 30, 2006 961 2006–22 I.R.B.



Submission under section 10.11 may be

examined while the Group Submission is

pending with respect to issues not identi-

fied in the Group Submission at the time

such plan comes Under Examination. In

addition, if it is determined that either the

plan or the Plan Sponsor was, or may have

been a party to an abusive tax avoidance

transaction (as defined in section 4.13(2)),

the Service may authorize the examination

of the plan, even if a submission pursuant

to VCPis pending. This practice regarding

concurrent examinations does not extend

to other plans of the Plan Sponsor. Thus,

any plan of the Plan Sponsor that is not

pending under VCP could be subject to ex-

amination.

.05 Determination letter application for

plan amendments related to a VCP submis-

sion. In any case in which a determina-

tion letter is submitted pursuant to section

4.06, the Plan Sponsor must submit a copyof the amendment, the appropriate appli-

cation form (i.e., Form 5300 series), and

the appropriate user fee concurrently and

to the same address as the VCP submis-

sion. The user fee for the determination

letter application and the fee for the VCP

submission must be submitted on separate

checks made payable to the U.S. Treasury.

See section 11.12 for the VCP mailing ad-

dress.

.06 Determination letter applications

not related to a VCP submission. (1)

The Service may process a determina-tion letter application submitted under the

determination letter program (including

an application requested on Form 5310)

concurrently with a VCP submission for

the same plan. However, issuance of the

determination letter in response to an ap-

plication made on a Form 5310 will be

suspended pending the closure of the VCP

submission.

(2) A submission of a plan under the de-

termination letter program does not consti-

tute a submission under VCP. If the Plan

Sponsor discovers a Qualification Failure,the Qualification Failure may not be cor-

rected as part of the determination letter

process. The Plan Sponsor may use SCP

and VCP instead, as applicable. If the Ser-

vice in connection with a determination

letter application discovers a Qualification

Failure, the Service may issue a closing

agreement with respect to the failures iden-

tified or, if appropriate, refer the case to

Employee Plans Examinations. In either

case, the fee structure in section 12, relat-

ing to VCP will not apply. Except as pro-

vided in section 10.06(3), the fee structure

in section 14 relating to Audit CAP will ap-

ply. See section 5.03(3) fora description of

when a plan submitted for a determination

letter is considered to be Under Examina-

tion.

(3) If the Service in connection with a

determination letter application discovers

the plan has not been amended timely for

tax legislation changes, the fee structure in

section 14.04 will apply.

.07 Processing of submission. (1)

Screening of submission. Upon receipt

of a submission under VCP, the Service

will review whether the eligibility require-

ments of section 4 and the submission

requirements of section 11 are satisfied.

(2) Eligibility of submission. If, at any

stage of the review process, the Service

determines that a VCP submission is se-riously deficient or that the application of

VCP would be inappropriate or impracti-

cal, the Service reserves the right to return

the submission, including any compliance

fee, without contacting the Plan Sponsor.

(3) Review of submission. Once the

Service determines that the submission

is complete under VCP, the Service will

consult with the Plan Sponsor or the Plan

Sponsor’s representative to discuss the

proposed corrections and the plan’s ad-

ministrative procedures.

(4) Additional information required . If additional information is required, a Ser-

vice representative will generally contact

the Plan Sponsor or the Plan Sponsor’s

representative and explain what is needed

to complete the submission. The Plan

Sponsor will have 21 calendar days from

the date of this contact to provide the re-

quested information. If the information is

not received within 21 days, the matter will

be closed, the compliance fee will not be

returned, and the case may be referred to

Employee Plans Examinations. Any re-

quest for an extension of the 21-day timeperiod must be made in writing within the

21-day time period and must be approved

by the Service (by the applicable group

manager).

(5) Additional failures discovered after

initial submission. (a) A Plan Sponsor that

discovers additional unrelated Qualifica-

tion or 403(b) Failures after its initial sub-

mission may request that such failures be

added to its submission. However, the Ser-

vice retains the discretion to reject the in

clusion of such failures if the request is no

timely; for example, if the Plan Sponso

makes its request when processing of th

submission is substantially complete.

(b) If the Service discovers an unrelate

Qualification or 403(b) Failure while th

request is pending, the failure generall

will be added to the failures under con

sideration. However, the Service retain

the discretion to determine that a failure i

outside the scope of the voluntary reques

for consideration because the Plan Spon

sor did not voluntarily bring it forward. I

this case, if the additional failure is signif

icant, all aspects of the plan may be exam

ined and the rules pertaining to Audit CAP

will apply.

(6) Conference right . If the Service ini

tially determines that it cannot issue a com

pliance statement because the parties can

not agree upon correction or a change inadministrative procedures, the Plan Spon

sor (generally through the Plan Sponsor’

representative) will be contacted by th

Service representative and offered a con

ference with the Service. The conferenc

can be held either in person or by telephon

and must be held within 21 calendar day

of the date of contact. The Plan Sponso

will have 21 calendar days after the date o

the conference to submit additional infor

mation in support of the submission. An

request for an extension of the 21-day tim

period must be made in writing within th21-day time period and must be approve

by the Service (by the applicable group

manager). Additional conferences may b

held at the discretion of the Service.

(7) Failure to reach resolution. If th

Service and the Plan Sponsor cannot reach

agreement with respect to the submission

the matter will be closed, the complianc

fee will not be returned, and the case may

be referred to Employee Plans Examina

tions. In the case of an Anonymous Sub

mission that fails to reach resolution unde

this revenue procedure, the Service will refund 50% of the applicable VCP fee. Se

section 12.01 for the VCP fee.

(8) Issuance of compliance statemen

If agreement is reached, the Service wil

send to the Plan Sponsor a complianc

statement specifying the corrective actio

required. If the original submission i

subsequently materially modified, then

unless the Plan Sponsor has submitted

penalty of perjury statement with respec

2006–22 I.R.B. 962 May 30, 200



to such subsequent modifications, the

Plan Sponsor will be required to sign the

compliance statement. In such case, the

Service will send to the Plan Sponsor an

unsigned compliance statement specifying

the corrective action required. Within 30

calendar days of the date the compliance

statement is sent, a Plan Sponsor must sign

the compliance statement and return it and

any compliance fee required to be paid at

the time that the compliance statement is

signed (see section 11.05). The Service

will then issue a signed copy of the compli-

ance statement to the Plan Sponsor. If the

Plan Sponsor does not sign the compliance

statement and send it to the Service (with

a compliance fee, if applicable) within 30

calendar days, the plan may be referred to

Employee Plans Examinations.

(9) Timing of correction. The Plan

Sponsor must implement the specific cor-

rections and administrative changes setforth in the compliance statement within

150 days of the date of the compliance

statement. Any request for an extension

of this time period must be made prior to

the expiration of the correction period and

in writing and must be approved by the

Service.

(10) Modification of compliance state-

ment . Once the compliance statement has

been issued (based on the information pro-

vided), the Plan Sponsor cannot request a

modification of the compliance terms ex-

cept by a new request for a compliancestatement. However, if the requested mod-

ification is minor and is postmarked no

later than 30 days after the compliance

statement is issued, the compliance fee for

the modification will be the lesser of the

original compliance fee or $3,000.

(11) Verification. Once the compliance

statement has been issued, the Service

may require verification that the correc-

tion methods have been complied with and

that any plan administrative procedures re-

quired by the compliance statement have

been implemented. This verification doesnot constitute an examination of the books

and records of the employer or the plan

(within the meaning of § 7605(b)). If the

Service determines that the Plan Sponsor

did not implement the corrections and pro-

cedures within the stated time period, the

plan may be referred to Employee Plans

Examinations.

.08 Compliance statement . (1) General

description of compliance statement . The

compliance statement issued for a VCP

submission addresses the failures identi-

fied, the terms of correction, including any

revision of administrative procedures, and

the time period within which proposed cor-

rections must be implemented, including

any changes in administrative procedures.

The compliance statement also provides

that the Service will not treat the plan as

failing to satisfy the applicable require-

ments of the Code on account of the fail-

ures described in the compliance statement

if the conditions of the compliance state-

ment are satisfied. Unless a determina-

tion letter application is included with a

VCP submission for an on-cycle or ter-

minating plan in accordance with section

4.06, with respect to a failure to amend a

plan timely for (a) good faith plan amend-

ments for the Economic Growth and Tax

Relief Reconciliation Act of 2001, Pub. L.

107–16 (EGTRRA), within the period de-scribed in Notice 2001–42 including those

changes listed in Notice 2005–5, (b) plan

amendments for the final and temporary

regulations under § 401(a)(9) as they ap-

peared in the April 1, 2003, edition of 26

CFR Part 1 (the § 401(a)(9) final and tem-

porary regulations) within the period de-

scribed in Rev. Proc. 2002–29 as modi-

fied by Rev. Proc. 2003–10, and (c) in-

terim amendments as provided in section

5 of Rev. Proc. 2005–66, the issuance of

a compliance statement will result in the

corrective amendments being treated as if they had been adopted timely for the pur-

pose of determining the availability of the

remedial amendment period currently de-

scribed in Rev. Proc. 2005–66. How-

ever, the issuance of such a compliance

statement will not constitute a determina-

tion as to whether the plan amendment as

drafted complies with the change in quali-

fication requirement. Where current pro-

cedures are inadequate for operating the

plan in conformance with the applicable

requirements of the Code, the compliance

statement will be conditioned upon the im-plementation of stated administrative pro-

cedures. The Service may prescribe ap-

propriate administrative procedures in the

compliance statement.

(2) Compliance statement conditioned

upon timely correction. The compliance

statement is conditioned on (i) there being

no misstatement or omission of material

facts in connection with the submission

and (ii) the implementation of the specific

corrections and satisfaction of any other

conditions in the compliance statement.

(3) Authority delegated . Compliance

statements (including relief from any ex-

cise tax as provided under section 6.09) are

authorized to be signed by Area Managers

reporting to the Director, Employee Plans

Examinations, and managers within Em-

ployee Plans Rulings and Agreements, un-

der the Tax Exempt and Government Enti-

ties Operating Division of the Service.

.09 Effect of compliance statement on

examination. The compliance statement is

binding upon both the Service and the Plan

Sponsor or Eligible Organization (as de-

fined in section 10.11(2)) with respect to

the specific tax matters identified therein

for the periods specified, but does not pre-

clude or impede an examination of the plan

by the Service relating to matters outside

the compliance statement, even with re-

spect to the same taxable year or years towhich the compliance statement relates.

.10 Special rules relating to Anony-

mous (John Doe) Submissions. (1) The

Anonymous Submission procedure in

this section 10.10 permits submission of

Qualified Plans, 403(b) Plans, SEPs and

SIMPLE IRA Plans under VCP without

initially identifying the applicable plan(s),

the Plan Sponsor(s), or the Eligible Or-

ganization. The requirements of this rev-

enue procedure relating to VCP, including

sections 10, 11, and 12, apply to these

submissions. However, information iden-tifying the plan or the Plan Sponsor may

be redacted (and the power of attorney

statement and the penalty of perjury state-

ment need not be included with the initial

submission). In addition, if a determina-

tion letter application will be requested as

part of the submission, the determination

letter application should not be submitted

until the time all identifying information

is provided to the Service. For purposes

of processing the submission, the State

of the Plan Sponsor must be identified

in the initial submission. All anonymoussubmissions must be numbered or labeled

on the first page of the VCP submission

by the plan sponsor or its representative

to facilitate identification and tracking of

the submission. The identification num-

ber should be unique to the submission

and should not be used with respect to

any other anonymous submission of the

plan sponsor or representative. Once the

Service and the plan representative reach

May 30, 2006 963 2006–22 I.R.B.



agreement with respect to the submission,

the Service will contact the plan repre-

sentative in writing indicating the terms

of the agreement. The Plan Sponsor will

have 21 calendar days from the date of the

letter of agreement to identify the plan and

Plan Sponsor. If the Plan Sponsor does not

submit the identifying material (including

the power of attorney statement and the

penalty of perjury statement) within 21

calendar days of the letter of agreement,

the matter will be closed and the compli-

ance fee will not be returned.

(2) Notwithstanding section 10.04, un-

tilthe plan(s) and Plan Sponsor(s) areiden-

tified to the Service, a submission under

this subsection does not preclude or im-

pede an examination of the Plan Sponsor

or its plan(s). Thus, a plan submitted un-

der the Anonymous Submission procedure

that comes Under Examination prior to the

date the plan(s) and Plan Sponsor(s) identi-fying materials are received by the Service

will no longer be eligible under VCP.

.11 Special rules relating to Group Sub-

missions. (1) General rules. An Eligible

Organization may submit a VCP request

for a Qualified Plan, a 403(b) Plan, a SEP,

or a SIMPLEIRA Plan under a Group Sub-

mission for Plan Document, Operational

and Employer Eligibility Failures. If a

Sponsor of a master or prototype plan sub-

mits failures with respect to more than one

master or prototype plan, each plan will be

treated as a separate submission and a sep-arate fee must be submitted for each pro-

totype plan. Similarly, if a Volume Sub-

mitter practitioner submits failures with re-

spect to more than one Volume Submitter

plan, each plan will be treated as a sepa-

rate submission and a separate fee must be

submitted for each specimen plan.

(2) Eligible Organizations. For pur-

poses of a Group Submission, the term

“Eligible Organization” means either (a)

a Sponsor (as that term is defined in sec-

tion 4.07 of Rev. Proc. 2005–16, 2005–10

I.R.B. 674) of a master or prototype plan,(b) a Volume Submitter practitioner, as that

term is defined in section 13.04 of Rev.

Proc. 2005–16, (c) an insurance company

or other entity that has issued annuity con-

tracts or provides services with respect to

assets for 403(b) Plans, or (d) an entity

that provides its clients with administrative

services with respect to Qualified Plans,

403(b) Plans, SEPs or SIMPLE IRA Plans.

An Eligible Organization is not eligible to

make a Group Submission unless the sub-

mission includes a failure resulting from a

systemic error involving the Eligible Or-

ganization that affects at least 20 plans and

that result in at least 20 plans implement-

ing correction. If, at any time before the

Service issues the compliance statement,

the number of plans falls below 20, the Eli-

gible Organization must notify the Service

that it is no longer eligible to make a Group

Submission (and the compliance fee may

be retained).

(3) Special Group Submission proce-

dures. (a) In general, a Group Submission

is subject to the same procedures as any

VCP submission in accordance with sec-

tions 10 and 11, except that the Eligible

Organization is responsible for perform-

ing the procedural obligations imposed on

the Plan Sponsor under sections 10 and 11.

See section 11.02(15) for a special sub-

mission requirement with respect to GroupSubmissions.

(b) The Eligible Organization must pro-

vide notice to all Plan Sponsors of the

plans included in the Group Submission.

The notice must be provided at least 90

days before the Eligible Organization pro-

vides the Service with the information re-

quired in section 10.11(3)(c). The purpose

of the notice is to provide each Plan Spon-

sor with information relating to the Group

Submission request. The notice should ex-

plain the reason for the Group Submis-

sion and inform the Plan Sponsor that thePlan Sponsor’s plan will be included in the

Group Submission unless the Plan Spon-

sor responds within the 90-day period to

exclude the Plan Sponsor’s plan from the

Group Submission.

(c) When an Eligible Organization re-

ceives an unsigned compliance statement

on the proposed correction and agrees to

the terms of the compliance statement, the

Eligible Organization must return to the

Service within 120 calendar days not only

the signed compliance statement and any

additional compliance fee under section12.05, but also a list containing (i) the em-

ployers’ tax identification numbers for the

Plan Sponsors of the plans to which the

compliance statement may be applicable,

(ii) the plans by name, plan number, type

of plan and number of plan participants,

(iii) a certification that each Plan Spon-

sor received notice of the Group Submis-

sion, and (iv) a certification that each Plan

Sponsor timely filed the Form 5500 return

for each plan. This list can be submit

ted at any stage of the submission proces

provided that the requirements of sectio

10.11(3)(b) have been satisfied. Appli

cants are encouraged to submit the list o

a computer disk in Microsoft Word. Only

those plans for which correction is actu

ally made within 240 calendar days of th

date of the signed compliance statemen

(or within such longer period as may b

agreed to by the Service at the request o

the Eligible Organization) will be covere

by the compliance statement.

(d) Notwithstanding section 4.02, if

Plan Sponsor of a plan that is eligible to b

included in the Group Submission is noti

fied of an impending Employee Plans ex

amination after the Eligible Organizatio

filed the Group Submission application

the Plan Sponsor’s plan will be included i

the Group Submission. However, with re

spect to such plan, the Group Submissiowill not preclude or impede an examina

tion of the plan with respect to any failure

not identified in the Group Submission ap

plication at the time the plan comes Unde

Examination.

.12 Multiemployer and multiple em

ployer plans. (1) In the case of a multiem

ployer or multiple employer plan, the pla

administrator (rather than any contributin

or adopting employer) must request con

sideration of the plan under the programs

The request must be with respect to th

plan, rather than a portion of the plan affecting any particular employer.

(2) If a VCP submission for a multi

employer or multiple employer plan ha

failures that apply to fewer than all of the

employers under the plan, the plan admin

istrator may choose to have the compli

ance fee (in section 12) or sanction (in sec

tion 14) calculated separately for each em

ployer based on the assets attributable to

that employer, rather than being attribut

able to the assets of the entire plan. Thus

the plan administrator may choose to ap

ply the provisions of this paragraph wherthe failure is attributable in whole or in par

to data, information, actions, or inaction

that are within the control of the employ

ers rather than the multiemployer or mul

tiple employer plan (such as attribution i

whole or in part to the failure of a employe

to provide the plan administrator with ful

and complete information).

2006–22 I.R.B. 964 May 30, 200



SECTION 11. APPLICATION

PROCEDURES FOR VCP

.01 General rules. The requirements

of this section 11 are satisfied if the re-

quest for a compliance statement from the

Service under VCP satisfies the informa-

tional and other requirements of this sec-

tion 11. In general, a request under VCP

consists of a letter from the Plan Sponsor (which may be a letter from the Plan Spon-

sor’s representative) or Eligible Organiza-

tion (or representative) to the Service that

contains a description of the failures, a de-

scription of the proposed methods of cor-

rection, and other procedural items, and in-

cludes supporting information and docu-

mentation as described below. If the sole

failure involves the failure by the Plan

Sponsor to amend a plan timely for (a)

good faith plan amendments for EGTRRA,

(b) plan amendments for the final and tem-porary regulations under § 401(a)(9) or (c)

interim amendments, then the Plan Spon-

sor may follow the streamlined submis-

sion procedure described in Appendix F.

In such circumstance, a complete submis-

sion pursuant to Appendix F will satisfy

the submission requirements provided be-

low.

.02 Submission requirements. The letter

from the Plan Sponsor or the Plan Spon-

sor’s representative must contain the fol-

lowing:

(1) A statement identifying the typeof plan submitted (e.g., Qualified Plan,

403(b) Plan, SEP, or SIMPLE IRA Plan)

and, if applicable, whether the submission

is a Group Submission, an Anonymous

Submission, a nonamender submission,

a multiemployer or multiple employer

plan submission, or an Orphan Plan sub-

mission. In addition, if the submission

involves a Qualified Plan, the statement

should also identify the type of Qualified

Plan being submitted (e.g., Defined Ben-

efit, Money Purchase, Profit Sharing, or

Stock Bonus, and 401(k) or ESOP).(2) A complete description of the fail-

ures, the years in which the failures oc-

curred, including closed years (that is,

years for which the statutory period has

expired), and the number of employees

affected by each failure.

(3) A description of the administrative

procedures in effect at the time the failures

occurred.

(4) An explanation of how and why the

failures arose.

(5) A detailed description of the method

for correcting the failures that the Plan

Sponsor has implemented or proposes to

implement. Each step of the correction

method must be described in narrative

form. The description must include the

specific information needed to support the

suggested correction method. This infor-

mation includes, for example, the number

of employees affected and the expected

cost of correction (both of which may be

approximated if the exact number cannot

be determined at the time of the request),

the years involved, and calculations or

assumptions the Plan Sponsor used to

determine the amounts needed for correc-

tion.

(6) A description of the methodology

that will be used to calculate earnings or

actuarial adjustments on any correctivecontributions or distributions (indicating

the computation periods and the basis

for determining earnings or actuarial ad-

justments, in accordance with section

6.02(4)).

(7) Specific calculations for each af-

fected employee or a representative sam-

ple of affected employees. The sample

calculations must be sufficient to demon-

strate each aspect of the correction method

proposed. For example, if a Plan Spon-

sor requests a compliance statement with

respect to a failure to satisfy the contri-bution limits of § 415(c) and proposes a

correction method that involves elective

contributions (whether matched or un-

matched) and matching contributions, the

Plan Sponsor must submit calculations il-

lustrating the correction method proposed

with respect to each type of contribution.

As another example, with respect to a fail-

ure to satisfy the ADP test in § 401(k)(3),

the Plan Sponsor must submit the ADP

test results both before the correction and

after the correction.

(8) The method that will be used to lo-cate and notify former employees and ben-

eficiaries, or an affirmative statement that

no former employees or beneficiaries were

affected by the failures or will be affected

by the correction.

(9) A description of the measures that

have been or will be implemented to en-

sure that the same failures will not recur.

(10) A statement that, to the best of

the Plan Sponsor’s knowledge, neither the

plan nor the Plan Sponsor is Under Exam-

ination.

(11) A statement that neither the plan

nor the Plan Sponsor has been a party to an

abusive tax avoidance transaction (as de-

fined in section 4.13(2)) or a brief identifi-

cation of any abusive tax avoidance trans-

action to which the plan or the Plan Spon-

sor has been a party.

(12) If a submission includes a failure

that relates to Transferred Assets and the

failure occurred prior to the transfer, a de-

scription of the transaction (including the

dates of the employer change and the plan

transfer).

(13) A statement (if applicable) that the

plan is currently being considered in a de-

termination letter application that is not re-

lated to the VCP application. If the request

for a determination letter is made while

a request for consideration under VCP is

pending, the Plan Sponsor must update theVCP request to add this information.

(14) In the case of a 403(b) Plan submis-

sion, a statement that the Plan Sponsor has

contacted all other entities involved with

the plan and has been assured of cooper-

ation in implementing the applicable cor-

rection, to the extent necessary. For exam-

ple, if the plan’s failure is the failure to sat-

isfy the requirements of § 403(b)(1)(E) on

elective deferrals, the Plan Sponsor must,

prior to making the VCP application, con-

tact the insurance company or custodian

with control over the plan’s assets to as-sure cooperation in effecting a distribution

of the excess deferrals and the earnings

thereon. An application under VCP must

also contain a statement as to the type of

employer (e.g., a tax-exempt organization

described in § 501(c)(3)) submitting the

VCP application.

(15) A Group Submission must be

signed by the Eligible Organization or the

Eligible Organization’s authorized rep-

resentative and accompanied by a copy

of the relevant portions of the plan docu-

ment(s). In addition, a Group Submissionmust include a separate page for each af-

fected Plan Sponsor that provides the Plan

Sponsor’s name, EIN, plan name, and

failure(s).

.03 Required documents. A VCP sub-

mission must be accompanied by the fol-

lowing documents:

(1) Form 5500 or similar information.

(a) In the case of a plan required to file

Form 5500, a copy of the first three pages

May 30, 2006 965 2006–22 I.R.B.



of the most recently filed Form 5500 series

return and the applicable Financial Infor-

mation Schedule. In the case of a termi-

nated plan, the Form 5500 must be the one

filed for the plan year prior to the plan year

for which the Final Form 5500 return was

filed.

(b) In the case of any plan not re-

quired to file Form 5500, e.g., a gov-

ernmental plan, nonelecting church plan,

SEP, SIMPLE IRA Plan, or an applicable

403(b) plan, the information that generally

would be included on the first three pages

of Form 5500, including the name and

number of the plan, the Plan Sponsor’s

EIN, and the amount of plan assets to the

extent that the information is available to

the Plan Sponsor.

(c) In the case of an Anonymous Sub-

mission, the employee census may be

redacted and replaced by numbers that are

rounded up.(2) Plan document . A copy of the entire

plan document or the relevant portions of

the plan document. For example, in a case

involving an improper exclusion of eligi-

ble employees from a profit-sharing plan

with a cash or deferred arrangement, rele-

vant portions of the plan document include

the eligibility, allocation, and cash or de-

ferred arrangement provisions of the ba-

sic plan document (and the adoption agree-

ment, if applicable), along with applica-

ble definitions in the plan. If the plan is

a 403(b) Plan and a plan document is notavailable, a written description of the plan

should be submitted, with sample salary

reduction agreements if relevant. In the

case of a SEP and a SIMPLE IRA Plan, the

entire plan document should be submitted.

(3) Determination letter application. In

any case in which correction of a Qualifi-

cation Failure is made by plan amendment,

as permitted under section 4.05, other than

the adoption of an amendment designated

by the Service as a model amendment or

the adoption of a prototype or volume sub-

mitter plan for which the Plan Sponsor has reliance on the plan’s opinion or ad-

visory letter as provided in Rev. Proc.

2006–6, 2006–1 I.R.B. 204, and the Plan

Sponsor is submitting a determination let-

ter request as permitted under section 4.06,

the Plan Sponsor must submit a copy of

the amendment, the appropriate applica-

tion form (i.e., Form 5300 series) to the ex-

tent required by section 4.06, and the ap-

propriate user fee concurrently and to the

same address as the VCP submission. The

user fee for the determination letter appli-

cation and the fee for the VCP submis-

sion must be submitted on separate checks

made payable to the U.S. Treasury. See

section 11.12 for the VCP mailing address.

.04 Date fee due generally. Except as

provided in sections 11.05 and 12.02(3),

the VCP fee under section 12 and, if ap-

plicable, the determination letter user fee,

must be included with the submission. The

VCP fee and the determination letter user

fee must be submitted on separate checks

made payable to the U.S. Treasury. If

the appropriate fees are not included in

the submission, the submission will be re-

turned.

.05 Additional fee due for SEPs,

SIMPLE IRA Plans, and Group Submis-

sions. In the case of a SEP, a SIMPLE IRA

Plan, or a Group Submission, the initial

fee described in section 12.02, 12.04, or 12.05 must be included in the submission

and any additional fee is due at the time

the compliance statement is signed by the

Plan Sponsor and returned to the Service,

or when agreement has been reached be-

tween the Service and the Plan Sponsor

regarding correction of the failure(s).

.06 Signed submission. The submission

must be signed by the Plan Sponsor or the

sponsor’s authorized representative.

.07 Power of attorney requirements. To

sign the submission or to appear before

the Service in connection with the sub-mission, the Plan Sponsor’s representa-

tive must comply with the requirements of

section 9.02(11) and (12) of Rev. Proc.

2006–4, 2006–1 I.R.B. 132, and submit

Form 2848, Power of Attorney and Dec-

laration of Representative. A Form 2848

that designates a representative not quali-

fied to sign Part II of the Form 2848, e.g.,

an unenrolled return preparer, will not be

accepted. A Plan Sponsor may authorize

an individual, such as an unenrolled return

preparer, to inspect or receive confidential

information using Form 8821, Tax Infor-mation Authorization (See Form 8821 and

Instructions.)

.08 Penalty of perjury statement . The

following declaration must accompany

a request and any factual information or

change in the submission at a later time:

“Under penalties of perjury, I declare

that I have examined this submission,

including accompanying documents,

and, to the best of my knowledge and

belief, the facts presented in suppor

of this submission are true, correct

and complete.” The declaration must b

signed by the Plan Sponsor, not the Plan

Sponsor’s representative.

.09 Checklist . The Service will be abl

to respond more quickly to a VCP reques

if the request is carefully prepared an

complete. The checklist in Appendix C i

designed to assist Plan Sponsors and thei

representatives in preparing a submissio

that contains the information and docu

ments required under this revenue proce

dure. The checklist in Appendix C must b

completed, signed, and dated by the Pla

Sponsor or the Plan Sponsor’s representa

tive. A photocopy of this checklist may b

used.

.10 Designation. The letter to the Ser

vice should indicate in the upper right han

corner of the letter the type of plan sub

mitted under VCP, a QualifiedPlan, 403(bPlan, SEP, or SIMPLE IRA Plan. In addi

tion, if the submission is a Group Submis

sion, an Anonymous Submission, a non

amender submission, a multiemployer o

multiple employer plan submission, or a

Orphan Plan submission, the letter shoul

so indicate.

.11 Acknowledgement Letter . The Ser

vice will acknowledge receipt of a VCP

submission if the Plan Sponsor or the Plan

Sponsor’s representative completes th

Acknowledgement Form in Appendix E

and includes it in the submission. A photocopy of Appendix E may be used.

.12 VCP mailing address. All VCP

submissions and accompanying determi

nation applications, if applicable, shoul

be mailed to:


Attention: SE:T:EP:RA:VC

P.O. Box 27063

McPherson Station

Washington, D.C. 20038

.13 Maintenance of copies of submis

sions. Plan Sponsors and their represen

tatives should maintain copies of all cor

respondence submitted to the Service with

respect to their VCP requests.

.14 Assembling the submission. Th

Service will be able to process a submis

sion more quickly if the submission pack

age contains all of the items required by th

2006–22 I.R.B. 966 May 30, 200



Appendix C check list and is assembled in

the following order:

(1) If applicable, Form 8717, User Fee

for Employee Plan Determination Letter

Request , and the check for the determi-

nation letter user fee made payable to the

U.S. Treasury.

(2) Determination letter application

(i.e., Form 5300 series form), if applicable

(3) Submission signed by the Plan

Sponsor or Plan Sponsor’s authorized

representative, with a check for the VCP

fee made payable to the U.S. Treasury

attached to the front of the submission

letter. The submission should include the

following:

• Type of plan (or group of plans) being

submitted

• Description of the failures (if the fail-

ures relate to Transferred Assets, in-

clude a description of the related em-

ployer transaction)• An explanation of how and why the

failures arose

• Description of the method for cor-

recting failures, including earnings

methodology (if applicable) and sup-

porting computations (if applicable)

• Description of the method used to lo-

cate or notify former employees af-

fected by the failures or corrections. If

no former employees are affected by

the failures or corrections, then the let-

ter should affirmatively state that posi-

tion when addressing this issue.

• Description of the administrative pro-

cedures that have been or will be im-

plemented to ensure that the failures do

not recur

• Whether a request that participant

loans corrected under this revenue

procedure not be treated as distri-

butions §72(p) is being made and

supporting rationale for such request.

Alternatively, whether a request that

participant loans corrected under this

revenue procedure should be treated as

distributions in the year of correction

is being made and supporting rationale

for such request.

• Whether relief from imposition of the

excise taxes under §§ 4972, 4974 or

4979 is being requested, and the sup-

porting rationale for such relief

• If the plan is an Orphan Plan, whether

relief from the VCP application fee is

being requested, and the supporting ra-tionale for such relief

• A statement on whether the plan is be-

ing considered in an unrelated determi-

nation letter application (if applicable)

• Statement that the plan is not Under

Examination

• Statement that the Plan Sponsor is not

under an Exempt Organizations exam-

ination

• A statement that neither the plan nor

the Plan Sponsor has been a party to an

abusive tax avoidance transaction (as

defined in section 4.13(2)) or a brief identification of any abusive tax avoid-

ance transaction to which the plan or

the Plan Sponsor has been a party.

• Penalty of perjury statement

(4) Completed and signed Appendix C

checklist

(5) Appendix E acknowledgement let-

ter

(6) Power of Attorney (Form 2848)

or Tax Information Authorization (Form

8821), if applicable

(7) Form 5500, (first three pages

and the applicable Financial Informa-

tion Schedule) or equivalent information

(8) Copy of opinion or determination

letter (if applicable)

(9) Relevant plan document language

or plan document (if applicable)

(10) Any other items that may be rele-

vant to the submission

SECTION 12. VCP FEES

.01 VCP fees. The compliance fees for

all submissions under VCP are determined

under this section 12. All fees must be sub-

mitted by check made payable to the U.S.

Treasury and, except for the special fees

described in sections 12.04 and 12.05(2),

must be included with the initial submis-

sion.

.02 VCP fee for Qualified Plans and

403(b) Plans. (1) Subject to section

12.02(2), the compliance fee for a sub-

mission under VCP for Qualified Plans

and 403(b) Plans (including AnonymousSubmissions) is determined in accordance

with the following chart.

Number of Participants Fee

20 or fewer $ 750

21 to 50 $ 1,000

51 to 100 $ 2,500

101 to 500 $ 5,000

501 to 1,000 $ 8,000

1,001 to 5,000 $15,000

5,001 to 10,000 $20,000

Over 10,000 $25,000

(2) If (a) the VCP submission involves

the failure to satisfy the minimum distribu-

tion requirements of § 401(a)(9) for 50 or

fewer participants, (b) such failure is the

only failure of the submission, and (c) the

failure would resultin the imposition of the

excise tax under § 4974, the compliance

fee is $500.

(3) At the discretion of the Service, the

VCP fee may be waived in the case of a

terminating Orphan Plan. In such cases,

May 30, 2006 967 2006–22 I.R.B.



the submission must include a request for

a waiver of the VCP fee.

.03 VCP fee for nonamender failures.

In general, the compliance fee for plans

with a nonamender failure, as described

in section 4.06, is determined in accor-

dance with the chart in section 12.02. The

applicable fee for a VCP submission that

contains only nonamender failures is re-

duced by 50% if it is submitted within

a one-year period following the expira-

tion of the plan’s remedial amendment

period for complying with such changes.

Notwithstanding the above, the compli-

ance fee for a submission that contains

only a failure to amend the plan timely

with respect to (a) good faith plan amend-

ments for EGTRRA within the period

described in Notice 2001–42 including

those changes listed in Notice 2005–5,

(b) plan amendments for the § 401(a)(9)

final and temporary regulations within theperiod described in Rev. Proc. 2002–29,

as modified by Rev. Proc. 2003–10, or (c)

interim amendments as provided in sec-

tion 5 of Rev. Proc. 2005–66 is $375.00.

.04 VCP fee for Group Submission. The

compliance fee for a Group Submission

is based on the number of plans affected

by the failure as described in the compli-

ance statement. The initial fee for the first

20 plans is $10,000. An additional fee is

due equal to the product of the number of

plans in excess of 20 multiplied by $250.

The maximum compliance fee for a GroupSubmission is $50,000. If more than one

master or prototype plan is submitted as a

Group Submission, each master or proto-

type plan is considered a separate Group

Submission for purposes of the compli-

ance fee.

.05 VCP fee for SEPs and SIMPLE IRA

Plans. (1) In general, the compliance fee

for a SEP or a SIMPLE IRA Plan submis-

sion (including an Anonymous Submis-

sion) is $250. Notwithstanding the preced-

ing sentence, the Service reserves the right

to impose the fee schedule under section12.02 or section 12.06 in appropriate cir-

cumstances.

(2) In any case in which a SEP or

SIMPLE IRA Plan correction is not sim-

ilar to a correction for a similar Qualifi-

cation Failure (as provided under section

6.10(1)), the Service may impose an addi-

tional fee. If the failure involves an Excess

Amount to a SEP or a SIMPLE IRA Plan

and the Plan Sponsor retains the Excess

Amount in the SEP or SIMPLE IRA Plan,

a fee equal to at least 10 percent of the

Excess Amount excluding earnings will

be imposed. This is in addition to the SEP

or SIMPLE IRA Plan compliance fee set

forth in section 12.05(1).

.06 VCP fee for egregious failures.

Notwithstanding the preceding provisions

of this section 12, in cases involving

failures that are egregious (as described

in section 4.08), the compliance fee for

Qualified Plans, 403(b) Plans, SEPs and

SIMPLE IRA Plans is the greater of (1)

the fee that would be determined under

the preceding provisions of this section

12, or (2) an amount equal to a negoti-

ated percentage of the Maximum Payment

Amount, such percentage not to exceed 40

percent.

.07 Establishing the number of plan

participants. Compliance fees under thissection 12 are determined based on the

total number of plan participants. For a

description of participant, see the Instruc-

tions for Form 5500, lines 6 and 7. For

new plans and ongoing plans, the number

of plan participants is determined from

the most recently filed Form 5500 series.

Thus, with respect to the 2004 Form 5500,

the Plan Sponsor would use the number

shown in item 7f (or the equivalent item

on the Form 5500 C/R or EZ) to establish

the total number of plan participants. In

the case of a terminated plan, the Form5500 used to determine the number of

plan participants must be the one filed for

the plan year prior to the plan year for

which the Final Form 5500 return was

filed. If the submission involves a plan

with Transferred Assets and no new in-

cidents of the failure occurred after the

end of the second plan year that begins

after the corporate merger, acquisition,

or other similar employer transaction, the

Plan Sponsor may calculate the number of

plan participants based on the Form 5500

information that would have been filedby the Plan Sponsor for the plan year that

includes the employer transaction if the

Transferred Assets were maintained as a

separate plan.

PART VI. CORRECTION ON AUDIT

(AUDIT CAP)

SECTION 13. DESCRIPTION OF

AUDIT CAP

.01 Audit CAP requirements. If the Ser

vice identifies a Qualification or 403(b

Failure (other than a failure that has bee

corrected in accordance with SCP or VCP

upon an Employee Plans or Exempt Orga

nizations examination of a Qualified Plan

403(b) Plan, SEP, or SIMPLE IRA Plan

the requirements of this section 13 are sat

isfied with respect to the failure if the Pla

Sponsor corrects the failure, pays a sanc

tion in accordance with section 14, satis

fies any additional requirements of sectio

13.03, and enters into a closing agreemen

with the Service.

.02 Payment of sanction. Payment o

the sanction under section 14 generally irequired at the time the closing agreemen

is signed. All sanction amounts should b

submitted by certified check or cashier’

check made payable to the U.S. Treasury

.03 Additional requirements. Depend

ing on the nature of the failure, the Ser

vice will discuss the appropriateness o

the plan’s existing administrative proce

dures with the Plan Sponsor. If existin

administrative procedures are inadequat

for operating the plan in conformance wit

the applicable requirements of the Code

the closing agreement may be conditioneupon the implementation of stated proce

dures. In addition, for Qualified Plans

pursuant to section 4.06, the Plan Sponso

may be required to obtain a Favorable Let

ter before the closing agreement is signed

If a Favorable Letter is required, the Plan

Sponsor is required to pay the applicabl

user fee for obtaining the letter.

.04 Failure to reach resolution. If th

Service and the Plan Sponsor cannot reach

an agreement with respect to the correc

tion of the failure(s) or the amount of th

sanction, the plan will be disqualified or, ithe case of a 403(b) Plan, SEP, or SIMPLE

IRA Plan will not have reliance on this rev

enue procedure.

.05 Effect of closing agreement . A clos

ing agreement constitutes an agreemen

between the Service and the Plan Spon

sor that is binding with respect to the ta

matters identified therein for the period

specified.

2006–22 I.R.B. 968 May 30, 200



.06 Other procedural rules. The proce-

dural rules for Audit CAP are set forth in

Internal Revenue Manual (“IRM”) 7.2.2,

EPCRS.

SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction. Except

as otherwise provided in section 14.04,

the sanction under Audit CAP is a negoti-

ated percentage of the Maximum Payment

Amount. Sanctions will not be excessive

and will bear a reasonable relationship to

the nature, extent, and severity of the fail-

ures, based on the factors below.

.02 Factors considered . Factors in-

clude: (1) the steps taken by the Plan

Sponsor to ensure that the plan had no

failures; (2) the steps taken to identify fail-

ures that may have occurred; (3) the extent

to which correction had progressed before

the examination was initiated, includingfull correction; (4) the number and type of

employees affected by the failure; (5) the

number of nonhighly compensated em-

ployees who would be adversely affected

if the plan were not treated as qualified or

as satisfying the requirements of § 403(b),

§ 408(k) or § 408(p); (6) whether the fail-

ure is a failure to satisfy the requirements

of § 401(a)(4), § 401(a)(26), or § 410(b),

either directly or through § 403(b)(12);

(7) the period over which the failure(s)

occurred (for example, the time that has

elapsed since the end of the applicable re-medial amendment period under § 401(b)

for a Plan Document Failure; and (8) the

reason for the failure(s) (for example,

data errors such as errors in transcription

of data, the transposition of numbers, or

minor arithmetic errors). Factors relating

only to Qualified Plans also include: (1)

whether the plan is the subject of a Fa-

vorable Letter; (2) whether the plan has

both Operational and other failures; (3)

the extent to which the plan has accepted

Transferred Assets, and the extentto which

the failure(s) relate to Transferred Assets

and occurred before the transfer; and (4)

whether the failure(s) were discovered

during the determination letter process.

If one of the failures discovered during

an Employee Plans examination includes

the failure to amend the plan timely for

relevant legislation, it is expected that

the sanction will be greater than the ap-

plicable fee described in section 14.04.

Additional factors relating only to 403(b)

Plans include: (1) whether the plan has

a combination of Operational, Demo-

graphic, or Employer Eligibility Failures;

(2) the extent to which the failure relatesto Excess Amounts; and (3) whether the

failure is solely an Employer Eligibility

Failure.

.03 Transferred Assets. If the exam-

ination involves a plan with Transferred

Assets and the Service determines that no

new incidents of the failures that relate to

the Transferred Assets occur after the end

of the second plan year that begins after


similar employer transaction, the sanction

under Audit CAP will not exceed the sanc-

tion that would apply if theTransferred As-sets were maintained as a separate plan.

.04 Fee for nonamenders discovered

during the determination letter application

process not related to a VCP submission.

(1) The compliance fee for nonamenders

(as defined in section 4.06) not voluntarily

identified by the Plan Sponsor, but instead

discovered by the Service in connection

with the determination letter application

process as described in section 5.03(3) is

determined in accordance with the chart

below. This fee schedule applies if the

only failure in the submission is the non-

amender failure.

(2) The acronyms listed in the chart re-

fer to the following laws:

(a) Employee Retirement Income Se-

curity Act of 1974 (ERISA),

(b) Tax Equity and Fiscal Responsibil-

ity Act of 1982 (TEFRA); Deficit Reduc-

tion Act of 1984 (DEFRA); and Retire-

ment Equity Act of 1984 (REA) together

(T/D/R),

(c) Tax Reform Act of 1986 (TRA

’86),

(d) Unemployment Compensation Act

of 1992 (UCA); Omnibus Budget and Rec-onciliation Act of 1993 (OBRA ’93),

(e) The Uruguay Round Agreements

Act; the Uniformed Services Employment

and Reemployment Rights Act of 1994;

the Small Business Job Protection Act of

1996; the Taxpayer Relief Act of 1997;

the Internal Revenue Service Restructur-

ing and Reform Act of 1998; and the Com-

munity Renewal Tax Relief Act of 2000

(collectively known as “GUST”),

(f) Final and temporary regulations

under § 401(a)(9), 74 FR 18987, published

on April 17, 2002 (“401(a)(9) Regs”),(g) The Economic Growth and

Tax Relief Reconciliation Act of 2001

(“EGTRRA”).

Number of

Participants

EGTRRA/

subsequent

legislation

GUST/

401(a)(9) Regs

UCA/

OBRA ’93 TRA ’86 T/D/R ERISA

20 or less $ 2,500 $ 3,000 $ 3,500 $ 4,000 $ 4,500 $ 5,00021–50 $ 5,000 $ 6,000 $ 7,000 $ 8,000 $ 9,000 $10,000

51–100 $ 7,500 $ 9,000 $10,500 $12,000 $13,500 $15,000

101–500 $12,500 $15,000 $17,500 $20,000 $22,500 $25,000

501–1,000 $17,500 $21,000 $24,500 $28,000 $31,500 $35,000

1,001–5,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000

5,001–10,000 $32,500 $39,000 $45,500 $52,000 $58,500 $65,000

Over 10,000 $40,000 $48,000 $56,000 $64,000 $72,000 $80,000

May 30, 2006 969 2006–22 I.R.B.



PART VII. EFFECT ON OTHER

DOCUMENTS; EFFECTIVE DATE;

PAPERWORK REDUCTION ACT

SECTION 15. EFFECT ON OTHER

DOCUMENTS

.01 Rev. Proc. 2003–44 modified and

superseded . Rev. Proc. 2003–44 is modi-

fied and superseded by this revenue proce-

dure.

SECTION 16. EFFECTIVE DATE

This revenue procedure is generally ef-

fective September 1, 2006. However, (1)

sections 11.11, 11.14, and 14.04 are effec-

tive on or after May 30, 2006, and (2) plan

sponsors are permitted, at their option, to

apply the provisions of this revenue proce-

dure on or after May 30, 2006.

Specifically, except in the case of (1)above and unless a plan sponsor applies

the provisions of this revenue procedure

earlier, this revenue procedure is effective:

(a) with respect to SCP, for failures for

which correction is not complete before

September 1, 2006;

(b) with respect to VCP, for applications

submitted on or after September 1, 2006;

and

(c) with respect to Audit CAP, for ex-

aminations begun on or after September 1,

2006.

SECTION 17. PAPERWORK

REDUCTION ACT

The collection of information con-

tained in this revenue procedure has been

reviewed and approved by the Office

of Management and Budget in accor-

dance with the Paperwork Reduction Act

(44 U.S.C. 3507) under control number

1545–1673.

An agency may not conduct or sponsor,

and a person is not required to respond

to, a collection of information unless thecollection of information displays a valid

OMB control number.

The collection of information in this

revenue procedure is in sections 4.05,

6.02(5)(d), 6.05, 10.01, 10.02, 10.05–.07,

10.10–10.12, 11.02–11.04, 11.06–11.14,

13.01, section 2.01–2.07 of Appendix

B, Appendix C, and Appendix E. This

information is required to enable the Com-

missioner, Tax Exempt and Government

Entities Division of the Internal Revenue

Service to make determinations regarding

the issuance of various types of closing

agreements and compliance statements.

This information will be used to issue

closing agreements and compliance state-

ments to allow individual plans to continue

to maintain their tax qualified and tax-de-

ferred status. As a result, favorable tax

treatment of the benefits of the eligible

employees is retained. The likely respon-

dents are individuals, state or local gov-

ernments, businesses or other for-profit

institutions, nonprofit institutions, and

small businesses or organizations.

The estimated total annual reporting or

recordkeeping burden is 76,222 hours.

The estimated annual burden per re-

spondent/recordkeeper varies from .5 to

45.5 hours, depending on individual cir-

cumstances, with an estimated average of

20.4 hours. The estimated number of re-spondents or recordkeepers is 3,745.

The estimated frequency of responses is

occasional.

Books or records relating to a collection

of information must be retained as long

as their contents may become material in

the administration of any internal revenue

law. Generally tax returns and tax return

information are confidential, as required

by 26 U.S.C. § 6103.


The principal authors of this revenue

procedure are Avaneesh Bhagat and Louis

Leslie of the Tax Exempt and Govern-

ment Entities Division. For further in-

formation concerning this revenue proce-

dure, please contact the Employee Plans’

taxpayer assistance telephone service at

1–877–829–5500 between 8:30 a.m. and

6:30 p.m., Eastern Time, Monday through

Friday (a toll-free number). Mr. Bhagat

and Mr. Leslie may be reached at (202)

283–9888 (not a toll-free number).

APPENDIX A

OPERATIONAL FAILURES AND

CORRECTION METHODS

.01 General rule. This appendix sets

forth Operational Failures and Correc-

tion Methods relating to Qualified Plans.

In each case, the method described cor-

rects the Operational Failure identified

in the headings below. Corrective allo

cations and distributions should reflec

earnings and actuarial adjustments in ac

cordance with section 6.02(4) of Rev

Proc. 2006–27. The correction meth

ods in this appendix are acceptable unde

SCP and VCP. Additionally, the correc

tion methods and the earnings adjustmen

methods in Appendix B are acceptable un

der SCP and VCP. To the extent a failur

listed in this appendix could occur unde

a 403(b) Plan, a SEP or a SIMPLE IRA

Plan, the correction method listed for suc

failure may be used to correct the failure.

.02 Failure to properly provide the min

imum top-heavy benefit under § 416 t

non-key employees. In a defined contribu

tion plan, the permitted correction metho

is to properly contribute and allocate th

required top-heavy minimums to the plan

in the manner provided for in the pla

on behalf of the non-key employees (andany other employees required to receiv

top-heavy allocations under the plan). I

a defined benefit plan, the minimum re

quired benefit must be accrued in the man

ner provided in the plan.

.03 Failure to satisfy the ADP test se

forth in § 401(k)(3), the ACP test set fort

in § 401(m)(2), or, for plan years begin

ning on or before December 31, 2001, th

multiple use test of § 401(m)(9). The per

mitted correction method is to make quali

fied nonelective contributions (QNCs) (a

defined in §1.401(k)–6 and formerly i§ 1.401(k)–1(g)(13)(ii)) on behalf of th

nonhighly compensated employees to th

extent necessary to raise the actual defer

ral percentage or actual contribution per

centage of the nonhighly compensated em

ployees to the percentage needed to pas

the test or tests. The contributions mus

be made on behalf of all eligible nonhighl

compensated employees (to the extent per

mitted under § 415) and must be the sam

percentage of compensation. QNCs con

tributed to satisfy the ADP test need no

be taken into account for determining additional contributions (e.g., a matching con

tribution), if any. Employees who woul

have been eligible for a matching contri

bution had they made elective contribu

tions must be counted as eligible employ

ees for the ACP test, and the plan mus

satisfy the ACP test. Under this correc

tion method, a plan may not be treate

as two separate plans, one covering other

wise excludable employees and the othe

2006–22 I.R.B. 970 May 30, 200



covering all other employees (as permit-

ted in § 1.410(b)–6(b)(3)), in order to re-

duce the number of employees eligible to

receive QNCs. Likewise, under this cor-

rection method, the plan may not be re-

structured into component plans in order

to reduce the number of employees eligi-

ble to receive QNCs.

.04 Failure to distribute elective defer-

rals in excess of the § 402(g) limit (in con-

travention of § 401(a)(30)). The permitted

correction method is to distribute the ex-

cess deferral to the employee and to report

the amount as taxable in the year of defer-

ral and in the year distributed. In accor-

dance with § 1.402(g)–1(e)(1)(ii), a distri-

bution to a highly compensated employee

is included in the ADP test; a distribution

to a nonhighly compensated employee is

not included in the ADP test.

.05 Exclusion of an eligible employee

from all contributions or accruals under the plan for one or more plan years. (1)

For plans with employer provided contri-

butions or benefits (which are neither elec-

tive contributions under a qualified cash or

deferred arrangement under § 401(k) nor

matching or after-tax employee contribu-

tions that are subject to § 401(m)), the per-

mitted correction method is to make a con-

tribution to the plan on behalf of the em-

ployees excluded from a defined contri-

bution plan or to provide benefit accruals

for the employees excluded from a defined

benefit plan.(2) For plans providing benefits subject

to § 401(k) or § 401(m), the corrective con-

tribution for an improperly excluded em-

ployee is described in the following para-

graphs. (See examples 3 through 10 of Ap-

pendix B.)

(a) If the employee was not provided

the opportunity to elect and make elec-

tive deferrals (other than designated Roth

contributions) to a 401(k) plan that does

not satisfy the safe harbor contribution

requirements of section 401(k)(12), the

employer must make a QNC to the plan onbehalf of the employee that compensates

for the “missed deferral opportunity.” The

missed deferral opportunity is equal to

50% of the employee’s “missed defer-

ral.” The missed deferral is determined

by multiplying the actual deferral percent-

age for the employee’s group in the plan

(either highly compensated or nonhighly

compensated) for the year of exclusion

by the employee’s compensation for that

year. The employee’s missed deferral

amount is reduced further to the extent

necessary to ensure that the missed defer-

ral does not exceed applicable plan limits,

including the annual deferral limit under

§ 402(g) for the calendar year in which

the failure occurred. Under this correction

method, a plan may not be treated as two

separate plans, one covering otherwise

excludable employees and the other cov-

ering all other employees (as permitted in

§ 1.410(b)–6(b)(3)) in order to reduce the

applicable ADP, the corresponding missed

deferral and the required QNC. Likewise,

restructuring the plan into component

plans is not permitted in order to reduce

the applicable ADP, the corresponding

missed deferral and the required QNC.

The QNC required to compensate the em-

ployee for the missed deferral opportunity

for the year of exclusion is adjusted for

earnings until the corrective QNC is madeon behalf of the affected employee.

(b) If the employee should have been

eligible for but did not receive an alloca-

tion of employer matching contributions

under a non-safe harbor plan because he or

she was not given the opportunity to make

elective deferrals, the employer should

make a QNC on behalf of the affected

employee. The QNC will be equal to

the matching contribution the employee

would have received had the employee

made a deferral equal to the missed de-

ferral determined under section .05(2)(a)of this Appendix A. The QNC must be

adjusted for earnings until the corrective

QNC is made on behalf of the affected

employee.

(c) If the employee was not provided

the opportunity to elect and make elec-

tive deferrals (other than designated Roth

contributions) to a safe harbor 401(k) plan

that uses a rate of matching contributions

to satisfy the safe harbor requirements

of § 401(k)(12), then the missed deferral

is deemed equal to the greater of 3% of

compensation or the maximum deferralpercentage for which the employer pro-

vides a matching contribution rate that

is at least as favorable as 100% of the

elective deferral made by the employee.

This estimate of the missed deferral re-

places the estimate based on the ADP test

in a traditional 401(k) plan. The required

QNC on behalf of the excluded employee

is equal to (i) the missed deferral opportu-

nity, which is an amount equal to 50% of

the missed deferral, plus (ii) the matching

contribution that would apply based on the

missed deferral. If an employee was not

provided the opportunity to elect and make

elective deferrals to a safe harbor 401(k)

plan that uses nonelective contributions

to satisfy the safe harbor requirements of

§ 401(k)(12), then the missed deferral is

deemed equal to 3% of compensation. The

required QNC on behalf of the excluded

employee is equal to (i) 50% of the missed

deferral, plus (ii) the nonelective contribu-

tion required to be made on behalf of the

employee. The QNC required to compen-

sate the employee for the missed deferral

opportunity and the corresponding match-

ing or nonelective contribution is adjusted

for earnings until the corrective QNC is

made on behalf of the affected employee.

(d) If the employee should have been el-

igible to elect and make after-tax employee

contributions (other than designated Rothcontributions), the employer must make

a QNC to the plan on behalf of the em-

ployee that is equal to the “missed op-

portunity for making after-tax employee

contributions.” The missed opportunity for

making after-tax employee contributions

is equal to 40% of the employee’s “missed

after-tax contributions.” The employee’s

missed after-tax contributions are equal to

the actual contribution percentage (ACP)

for the employee’s group (either highly

compensated or nonhighly compensated)

times the employee’s compensation, butwith the resulting amount not to exceed ap-

plicable plan limits. If the ACP consists of

both matching and after-tax employee con-

tributions, then, in lieu of basing the em-

ployee’s missed after-tax employee con-

tributions on the ACP for the employee’s

group, the employer is permitted to deter-

mine separately the portion of the ACP that

is attributable to after-tax employee con-

tributions for the employee’s group (either

highly compensated or nonhighly compen-

sated), multiplied by the employee’s com-

pensation for the year of exclusion. TheQNC also must be adjusted for earnings

until the corrective QNC is made on behalf

of the affected employee.

(e) If the employee was improperly

excluded from an allocation of employer

matching contributions because he or she

was not given the opportunity to make

after-tax employee contributions (other

than designated Roth contributions), the

employer should make a QNC on behalf

May 30, 2006 971 2006–22 I.R.B.



of the affected employee. The QNC is

equal to the matching contribution the

employee would have received had the

employee made an after-tax employee

contribution equal to the missed after-tax

employee contribution determined under

section .05(2)(d).

(f) The methods for correcting the fail-

ures described in this section .05(2) do not

apply until after the correction of other

qualification failures. Thus, for example,

if in addition to the failure of excluding an

eligible employee, the plan also failed the

ADP or ACP test, the correction methods

described in section .05(2)(a) through (e)

cannot be used until after correction of the

ADP or ACP test failures.

.06 Failure to timely pay the minimum

distribution required under § 401(a)(9).

In a defined contribution plan, the per-

mitted correction method is to distribute

the required minimum distributions. Theamount to be distributed for each year in

which the failure occurred should be de-

termined by dividing the adjusted account

balance on the applicable valuation date by

the applicable distribution period. For this

purpose, adjusted account balance means

the actual account balance, determined in

accordance with § 1.401(a)(9)–5 Q&A–3

of the regulations, reduced by the amount

of the total missed minimum distribu-

tions for prior years. In a defined benefit

plan, the permitted correction method is to

distribute the required minimum distribu-tions, plus an interest payment represent-

ing the loss of use of such amounts.

.07 Failure to obtain participant or

spousal consent for a distribution subject

to the participant and spousal consent

rules under §§ 401(a)(11), 411(a)(11),

and 417 . (1) The permitted correction

method is to give each affected partici-

pant a choice between providing informed

consent for the distribution actually made

or receiving a qualified joint and survivor

annuity. In the event that participant or

spousal consent is required but cannot beobtained, the participant must receive a

qualified joint and survivor annuity based

on the monthly amount that would have

been provided under the plan at his or

her retirement date. This annuity may be

actuarially reduced to take into account

distributions already received by the par-

ticipant. However, the portion of the qual-

ified joint and survivor annuity payable

to the spouse upon the death of the par-

ticipant may not be actuarially reduced to

take into account prior distributions to the

participant. Thus, for example, if in accor-

dance with the automatic qualified joint

and survivor annuity option under a plan,

a married participant who retired would

have received a qualified joint and sur-

vivor annuity of $600 per month payable

for life with $300 per month payable to

the spouse for the spouse’s life beginning

upon the participant’s death, but instead

received a single-sum distribution equal

to the actuarial present value of the par-

ticipant’s accrued benefit under the plan,

then the $600 monthly annuity payable

during the participant’s lifetime may be

actuarially reduced to take the single-sum

distribution into account. However, the

spouse must be entitled to receive an an-

nuity of $300 per month payable for life

beginning at the participant’s death.

(2) An alternative permitted correctionmethod is to give each affected participant

a choice between (i) providing informed

consent for the distribution actually made,

(ii) receiving a qualified joint and survivor

annuity (both (i) and (ii) of this section

.07(2) are as described in section .07(1) of

this Appendix A), or (iii) a single-sum pay-

ment equal to the actuarial present value

of that survivor annuity benefit (calculated

using the applicable interest rate and mor-

tality table under § 417(e)(3)). For exam-

ple, if the actuarial present value of a $300

per month annuity payable to the spousefor the spouse’s life beginning upon the

participant’s death is $7,837 (calculated

using the applicable interest rate and mor-

tality table under § 417(e)(3), and based

on the assumptions that the participant is

age 65, that the spouse is age 62, and that

the applicable interest rate is 6%), then the

single-sum payment under clause (iii) of

this section .07(2) is equal to $7,837. If

the spouse elects to receive the single-sum

payment, then the payment is treated in

the same manner as a distribution under

§ 402(c)(9) for purposes of rolling over thepayment to an IRA or other eligible retire-

ment plan.

.08 Failure to satisfy the § 415 limits

in a defined contribution plan. The per-

mitted correction for failure to limit an-

nual additions (other than elective defer-

rals and after-tax employee contributions)

allocated to participants in a defined con-

tribution plan as required in § 415 (even if

the excess did not result from the alloca-

tion of forfeitures or from a reasonable er

ror in estimating compensation) is to plac

the excess annual additions into an unallo

cated account, similar to the suspense ac

count described in § 1.415–6(b)(6)(iii), t

be used as an employer contribution in th

succeeding year(s). While such amount

remain in the unallocated account, the em

ployer is not permitted to make additiona

contributions to the plan. The permitte

correction for failure to limit annual ad

ditions that are elective deferrals or em

ployee contributions (even if the exces

did not result from a reasonable error in de

termining the amount of elective deferral

or after-tax employee contributions tha

could be made with respect to an individ

ual under the § 415 limits) is to distribut

the elective deferrals or after-tax employe

contributions using a method similar t

that described under § 1.415–6(b)(6)(iv)

Elective deferrals and after-tax employecontributions that are matched may be re

turned, provided that the matching contri

butions relating to such contributions ar

forfeited (which will also reduce exces

annual additions for the affected individu

als). The forfeited matching contribution

are to be placed into an unallocated ac

count to be used as an employer contribu

tion in succeeding periods.

APPENDIX B

CORRECTION METHODSAND EXAMPLES; EARNINGS

ADJUSTMENT METHODS

AND EXAMPLES

SECTION 1. PURPOSE,

ASSUMPTIONS FOR EXAMPLES

AND SECTION REFERENCES

.01 Purpose. (1) This appendix set

forth correction methods relating to Op

erational Failures under Qualified Plans

This appendix also sets forth earnings ad

justment methods. The correction meth

ods and earnings adjustment methods de

scribed in this appendix are acceptable un

der SCP and VCP.

(2) To the extent a failure listed in thi

appendix could occur under a 403(b) Plan

SEP, or a SIMPLE IRA Plan, the correc

tion method listed for such failure may b

used to correct the failure.

2006–22 I.R.B. 972 May 30, 200



.02 Assumptions for Examples. Unless

otherwise specified, for ease of presenta-

tion, the examples assume that:

(1) the plan year and the § 415 limita-

tion year are the calendar year;

(2) the employer maintains a single plan

intended to satisfy § 401(a) and has never

maintained any other plan;

(3) in a defined contribution plan, the

plan provides that forfeitures are used to

reduce future employer contributions;

(4) the Qualification Failures are Op-

erational Failures and the eligibility and

other requirements for SCP, VCP or Audit

CAP, whichever applies, are satisfied; and

(5) there are no Qualification Failures

other than the described Operational Fail-

ures, and if a corrective action would result

in any additional Qualification Failure, ap-

propriate corrective action is taken for that

additional Qualification Failure in accor-

dance with EPCRS..03 Section references. References to

section 2 and section 3 are references to the

section 2 and 3 in this appendix.

SECTION 2. CORRECTION METHODS

AND EXAMPLES

.01 ADP/ACP Failures.

(1) Correction Methods. (a) Appendix

A Correction Method. Appendix A, sec-

tion .03 sets forth a correction method for

a failure to satisfy the actual deferral per-

centage (“ADP”), actual contribution per-centage (“ACP”), or, for plan years be-

ginning on or before December 31, 2001,

multiple use test set forth in §§ 401(k)(3),

401(m)(2), and 401(m)(9), respectively.

(b) One-to-One Correction Method.

(i) General. In addition to the correction

method in Appendix A, a failure to sat-

isfy the ADP test, ACP test, or, for plan

years beginning on or before December

31, 2001, the multiple use test may be cor-

rected by using the one-to-one correction

method set forth in this section 2.01(1)(b).

Under the one-to-one correction method,an excess contribution amount is deter-

mined and assigned to highly compen-

sated employees as provided in paragraph

(1)(b)(ii) below. That excess contribution

amount (adjusted for earnings) is either

distributed to the highly compensated

employees or forfeited from the highly

compensated employees’ accounts as pro-

vided in paragraph (1)(b)(iii) below. That

same dollar amount (i.e., the excess con-

tribution amount, adjusted for earnings)

is contributed to the plan and allocated

to nonhighly compensated employees as

provided in paragraph (1)(b)(iv) below.

Under this correction method, a plan may

not be treated as two separate plans, one

covering otherwise excludable employees

and the other covering all other employ-

ees (as permitted in § 1.410(b)–6(b)(3)).

Likewise, restructuring the plan into com-

ponent plans is not permitted.

(ii) Determination of the Excess Contri-

bution Amount. The excess contribution

amount for the year is equal to the excess

of (A) the sum of the excess contributions

(as defined in § 401(k)(8)(B)), the excess

aggregate contributions (as defined in

§ 401(m)(6)(B)), and for plan years begin-

ning on or before December 31, 2001 the

amount treated as excess contributions or

excess aggregate contributions under the

multiple use test for the year, as assignedto each highly compensated employee

in accordance with § 401(k)(8)(C) and

(m)(6)(C), over (B) previous corrections

that complied with § 401(k)(8), (m)(6),

and, for plan years beginning on or before

December 31, 2001, the multiple use test.

(iii) Distributions and Forfeitures of the

Excess Contribution Amount. (A) The

portion of the excess contribution amount

assigned to a particular highly compen-

sated employee under paragraph (1)(b)(ii)

is adjusted for earnings through the date

of correction. The amount assigned to aparticular highly compensated employee,

as adjusted, is distributed or, to the extent

the amount was forfeitable as of the close

of the plan year of the failure, is forfeited.

If the amount is forfeited, it is used in ac-

cordance with the plan provisions relating

to forfeitures that were in effect for the

year of the failure. If the amount so as-

signed to a particular highly compensated

employee has been previously distributed,

theamount is an Excess Amount within the

meaning of section 5.01(3) of this revenue

procedure. Thus, pursuant to section 6.05of this revenue procedure, the employer

must notify the employee that the Excess

Amount was not eligible for favorable tax

treatment accorded to distributions from

qualified plans (and, specifically, was not

eligible for tax-free rollover).

(B) If any matching contributions (ad-

justed for earnings) are forfeited in accor-

dance with § 411(a)(3)(G), the forfeited

amount is used in accordance with the plan

provisions relating to forfeitures that were

in effect for the year of the failure.

(C) If a payment was made to an em-

ployee and that payment is a forfeitable

match described in either paragraph

(1)(b)(iii)(A) or (B), then it is an Over-

payment defined in section 5.01(6) of this

revenue procedure that must be corrected

(see sections 2.04 and 2.05 below).

(iv) Contribution and Allocation of

Equivalent Amount. (A) The employer

makes a contribution to the plan that

is equal to the aggregate amounts dis-

tributed and forfeited under paragraph

(1)(b)(iii)(A) (i.e., the excess contribution

amount adjusted for earnings, as provided

in paragraph (1)(b)(iii)(A), which does not

include any matching contributions for-

feited in accordance with § 411(a)(3)(G)

as provided in paragraph (1)(b)(iii)(B)).

The contribution must satisfy the vesting

requirements and distribution limitationsof § 401(k)(2)(B) and (C).

(B)(1) This paragraph (1)(b)(iv)(B)(1)

applies to a plan that uses the cur-

rent year testing method described in

§ 1.401(k)–2(a)(2), § 1.401(m)–2(a)(2)

and, for periods prior to the effective date

of those regulations, Notice 98–1, 1998–1

C.B. 327. The contribution made under

paragraph (1)(b)(iv)(A) is allocated to the

account balances of those individuals who

were either (I) the eligible employees for

the year of the failure who were not highly

compensated employees for that year or (II) the eligible employees for the year of

the failure who were not highly compen-

sated employees for that year and who also

are not highly compensated employees for

the year of correction. Alternatively, the

contribution is allocated to account bal-

ances of eligible employees described in

(I) or (II) of the preceding sentence, ex-

cept that the allocation is made only to the

account balances of those employees who

are employees on a date during the year

of the correction that is no later than the

date of correction. Regardless of whichof these four options (described in the two

preceding sentences) the employer selects,

eligible employees must receive a uniform

allocation (as a percentage of compensa-

tion) of the contribution. (See Examples

1 and 2.) Under the one-to-one correc-

tion method, the amount allocated to the

account balance of an employee (i.e., the

employee’s share of the total amount con-

tributed under paragraph (1)(b)(iv)(A)) is

May 30, 2006 973 2006–22 I.R.B.



not further adjusted for earnings and is

treated as an annual addition under § 415

for the year of the failure for the employee

for whom it is allocated.

(2) This paragraph (1)(b)(iv)(B)(2)

applies to a plan that uses the prior

year testing method described in

§ 1.401(k)–2(a)(2), § 1.401(m)–2(a)(2)

and, for periods prior to the effective

date of those regulations, Notice 98–1.

Paragraph (1)(b)(iv)(B)(1) is applied by

substituting “the year prior to the year of

the failure” for “the year of the failure”.

(2) Examples.

Example 1:

Employer A maintains a profit-sharing plan with

a cash or deferred arrangement that is intended to sat-

isfy § 401(k) using the current year testing method.

The plan does not provide for matching contributions

or employee after-tax contributions. In 2005, it was

discovered that the ADP test for 2003 was not per-

formed correctly. When the ADP test was performed

correctly, the test was not satisfied for 2003. For 2003, the ADP for highly compensated employees

was 9% and the ADP for nonhighly compensatedem-

ployees was 4%.

Accordingly, the ADP for highly compensated

employees exceeded the ADP for nonhighly com-

pensated employees by more than two percentage

points (in violation of § 401(k)(3)). There were two

highly compensated employees eligible under the

401(k) plan during 2003, Employee P and Employee

Q. Employee P made elective deferrals of $10,000,

which is equal to 10% of Employee P’s compen-

sation of $100,000 for 2003. Employee Q made

elective deferrals of $9,500, which is equal to 8% of

Employee Q’s compensation of $118,750 for 2003.

Correction:

On June 30, 2005, Employer A uses the one-to-

one correction method to correct the failure to sat-

isfy the ADP test for 2003. Accordingly, Employer

A calculates the dollar amount of the excess con-

tributions for the two highly compensated employ-

ees in the manner described in § 401(k)(8)(B). The

amount of the excess contribution for Employee P

is $4,000 (4% of $100,000) and the amount of the

excess contribution for Employee Q is $2,375 (2%

of $118,750), or a total of $6,375. In accordance

with § 401(k)(8)(C), $6,375, the excess contribution

amount, is assigned $3,437.50 to Employee P and

$2,937.50 to Employee Q. It is determined that the

earnings on the assigned amounts through June 30,

2005 are $687 and $587 for Employees P and Q, re-

spectively. The assigned amounts and the earnings

aredistributed to EmployeesP andQ. Therefore, Em-

ployee P receives $4,124.50 ($3,437.50 + $687) and

Employee Q receives $3,524.50 ($2,937.50 + $587).

In addition, on the same date, Employer A makes a

corrective contribution to the 401(k) plan equal to

$7,649 (the sum of the $4,124.50 distributed to Em-

ployee P and the $3,524.50 distributed to Employee

Q). The corrective contribution is allocated to the

account balances of eligible nonhighly compensated

employees for 2003, pro rata based on their compen-

sation for 2003 (subject to § 415 for 2003).

Example 2:

The facts are the same as in Example 1, except

that for 2003 the plan also provides for (1) after-tax

employee contributions and (2) matching contribu-

tions equal to 50% of the sum of an employee’s elec-

tive deferrals and after-tax employee contributions

that do not exceed 10% of the employee’s compen-

sation. The plan provides that matching contribu-

tions are subject to the plan’s 20% per year of ser-

vice vesting schedule and that matching contributions

are forfeited and used to reduce employer contribu-tions if associated elective deferrals or employee af-

ter-taxcontributionsare distributedto correct an ADP

or ACP test failure. For 2003, nonhighly compen-

sated employees made after-tax employee contribu-

tions and no highly compensated employee made any

after-tax employee contributions. Employee P re-

ceived a matching contribution of $5,000 (50% of

$10,000) and Employee Q received a matching con-

tribution of $4,750 (50% of $9,500). Employees P

and Q were 100% vested in 2003. It was determined

that the plan satisfied the requirements of the ACP

test for 2003.

Correction:

The same corrective actions are taken as in Ex-

ample 1. In addition, in accordance with the plan’s

terms, corrective action is taken to forfeit Employee

P’s and Employee Q’s matching contributions associ-

ated with their distributed excess contributions. Em-

ployee P’s distributed excess contributions and as-

sociated matching contributions are $3,437.50 and

$1,718.75, respectively. Employee Q’s distributed

excess contributions and associated matching con-

tributions are $2,937.50 and $1,468.75, respectively.

Thus, $1,718.75 is forfeited from Employee P’s ac-

count and $1,468.75 is forfeited from Employee Q’s

account. In addition, the earnings on the forfeited

amounts are also forfeited. It is determined that the

respective earnings on the forfeited amount for Em-

ployeeP is $250 andfor Employee Q is $220. The to-

tal amount of the forfeitures of $3,657.50 (EmployeeP’s $1,718.75 + $250 and Employee Q’s $1,468.75

+ $220) is used to reduce contributions for 2005 and

subsequent years.

.02 Exclusion of Otherwise Eligible

Employees.

(1) Exclusion of Eligible Employees

in a 401(k) or (m) Plan. (a) Correc-

tion Method. (i) Appendix A Correction

Method for Full Year Exclusion. Appen-

dix A, section .05 sets forth the correction

method for the exclusion of an eligible

employee from electing and making elec-

tive deferrals (other than designated Rothcontributions) and after-tax employee

contributions (other than designated Roth

contributions) to a plan that provides ben-

efits that are subject to the requirements

of § 401(k) or (m) for one or more full

plan years. (See Example 3.) Appendix A

section .05 also specifies the method for

determining missed deferrals and the cor-

rective contributions for employees who

were improperly excluded from electing

and making elective deferrals to a saf

harbor 401(k) plan for one or more ful

plan years. (See Examples 8, 9 and 10

In section 2.02(1)(a)(ii) below, the cor

rection method for the exclusion of a

eligible employee from all contribution

(other than designated Roth contributions

under a 401(k) or (m) plan for a full yea

is expanded to include correction for th

exclusion of an eligible employee from al

contributions (other than designated Roth

contributions) under a 401(k) or (m) pla

for a partial plan year. This correction fo

a partial year exclusion may be used i

conjunction with the correction for a ful

year exclusion.

(ii) Expansion of Correction Metho

to Partial Year Exclusion. (A) In Gen

eral. The correction method in Appen

dix A, section .05 is expanded to cover a

employee who was improperly exclude

from electing and making elective deferrals (other than designated Roth contribu

tions) or after-tax employee contribution

(other than designated Roth contributions

for a portion of a plan year or from receiv

ing matching contributions (on either elec

tive deferrals or after-tax employee contri

butions) for a portion of a plan year. I

such case, a permitted correction metho

for the failure is for the employer to sat

isfy this section 2.02(1)(a)(ii). The em

ployer makes a corrective contribution o

behalf of the excluded employee that sat

isfies the vesting requirements and distribution limitations of § 401(k)(2)(B) and

(C). The method and examples describe

to correct the failure to include otherwis

eligible employees do not apply until af

ter correction of other qualification fail

ures. Thus, for example, the correction

described in the narrative and examples in

this section cannot be used until after cor

rection of ADP or ACP test failures.

(B) Elective Deferral Failures. The ap

propriate corrective contribution for th

failure to allow an employee to elect an

make elective deferrals (other than designated Roth contributions) for a portion o

the plan year is equal to the missed defer

ral opportunity which is an amount equa

to 50% of the employee’s missed deferral

The employee’s missed deferral is deter

mined by multiplying the ADP of the em

ployee’s group (either highly or nonhighl

compensated), determined prior to correc

tion under this section 2.02(1)(a)(ii), b

the employee’s plan compensation for th

2006–22 I.R.B. 974 May 30, 200



portion of the year during which the em-

ployee was improperly excluded. In a safe

harbor 401(k) plan, the employee’s missed

deferral is determined by multiplying 3%

(or, if greater, whatever percentage of the

participant’s compensation which, if con-

tributed as an elective deferral, would have

been matched at a rate of 100% or more)

by the employee’s plan compensation for

the portion of the year during which the

employee was improperly excluded. The

corrective contribution for the portion of

the plan year during which the employee

was improperly excluded from being eli-

gible to make elective deferrals is reduced

to the extent that (1) the sum of the missed

deferral and any elective deferrals actu-

ally made by the employee for that year

would exceed (2) the maximum elective

deferrals permitted under the plan for the

employee for that plan year (including the

§ 402(g) limit). The corrective contribu-tion is adjusted for earnings. For purposes

of correcting other failures under this rev-

enue procedure (including determination

of any required matching contribution) af-

ter correction has occurred under this sec-

tion 2.02(1)(ii)(B), the employee is treated

as having made pre-tax elective deferrals

equal to the employee’s missed deferral for


employee was improperly excluded. (See

Examples 4 and 5.)

(C) After-tax Employee Contribution

Failures. The appropriate corrective con-tribution for the failure to allow employees

to elect and make after-tax employee con-

tributions for a portion of the plan year

is equal to the missed after-tax employee

contributions opportunity, which is an

amount equal to 40% of the employee’s

missed after-tax employee contributions.

The employee’s missed after-tax em-

ployee contributions is determined by

multiplying the ACP of the employee’s

group (either highly or nonhighly com-

pensated), determined prior to correction

under this section 2.02(1)(a)(ii)(C), bythe employee’s plan compensation for


employee was improperly excluded. If

the ACP consists of both matching and

after-tax employee contributions, then for

purposes of the preceding sentence, in

lieu of basing the missed after-tax em-

ployee contributions on the ACP for the

employee’s group (either highly com-

pensated or nonhighly compensated), the

employer is permitted to determine sep-

arately the portions of the ACP that are

attributable to matching contributions and

after-tax employee contributions and base

the missed after-tax employee contribu-

tions on the portion of the ACP that is

attributable to after-tax employee contri-

butions. The missed after-tax employee

contribution is reduced to the extent that

(1) the sum of that contribution and the ac-

tual total after-tax employee contributions

made by the employee for the plan year

would exceed (2) the sum of the maximum

after-tax employee contributions permit-

ted under the plan for the employee for the

plan year. The corrective contribution isadjusted for earnings.

(D) Matching Contribution Failures.

The appropriate corrective contribution

for the failure to make matching con-

tributions for an employee because the

employee was precluded from making

elective deferrals (other than designated

Roth contributions) or after-tax employee

contributions for a portion of the plan year

is equal to the matching contribution that

would have been made for the employee

if (1) the employee’s elective deferrals for

that portion of the plan year had equaledthe employee’s missed deferrals (deter-

mined under section 2.02(1)(a)(i)(B)) or

(2) the employee’s after-tax contribu-

tion for that portion of the plan year had

equaled the employee’s missed after-tax

employee contribution (determined under

section 2.02(1)(a)(ii)(C). This matching

contribution is reduced to the extent that

(1) the sum of this contribution and other

matching contributions actually made on

behalf of the employee for the plan year

would exceed (2) the maximum matching

contribution permitted if the employeehad made the maximum matchable con-

tributions permitted under the plan for the

plan year. The corrective contribution is

adjusted for earnings.

(E) Use of Prorated Compensation.

For purposes of this paragraph (1)(a)(ii),

for administrative convenience, in lieu of

using the employee’s actual plan com-

pensation for the portion of the year dur-

ing which the employee was improperly

excluded, a pro rata portion of the em-

ployee’s plan compensation that would

have been taken into account for the plan

year, if the employee had not been im-

properly excluded, may be used.

(F) Special Rule for Brief Exclusion

from Elective Deferrals and After-Tax

Employee Contributions. An employer is

not required to make a corrective contri-

bution with respect to elective deferrals

or after-tax employee contributions, as

provided in sections 2.02(1)(a)(ii)(B) and

(C), (but is required to make a corrective

contribution with respect to any match-

ing contributions, as provided in section

2.02(1)(a)(ii)(D)) for an employee for aplan year if the employee has been pro-

vided the opportunity to make elective

deferrals or after-tax employee contri-

butions under the plan for a period of at

least the last 9 months in that plan year

and during that period the employee had

the opportunity to make elective defer-

rals or after-tax employee contributions

in an amount not less than the maximum

amount that would have been permitted if

no failure had occurred. (See Examples 6

and 7.)

(b) Examples.

Example 3:

Employer B maintains a 401(k) plan. The plan

provides for matching contributions for eligible em-

ployees equal to 100% of elective deferrals that do

not exceed 3% of an employee’s compensation. The

plan allows employees to make after-tax employee

contributions up to a maximum of the lesser of 2%

of compensation or $1,000. The after-tax employee

contributions are not matched. The plan provides that

employees who complete one year of service are eli-

gible to participate in the plan on the next designated

entry date. The entry dates are January 1, and July 1.

In 2005, it is discovered that Employee V, a NHCE

with compensation of $30,000, was excluded fromthe plan for the 2003 plan year even though she satis-

fied the plan’s eligibility requirements as of January

1, 2003.

Forthe 2003 plan year, the relevant employee and

contribution information is as follows:

May 30, 2006 975 2006–22 I.R.B.



Compensation Elective deferral Match After-Tax Employee

Contribution

Highly Compensated Employees (HCEs):

R $200,000 $ 6,000 $6,000 0

S $150,000 $12,000 $4,500 $1,000

Nonhighly Compensated Employees (NHCEs):

T $80,000 $12,000 $2,400 $1,000

U $50,000 $ 500 $ 500 0

HCEs:

ADP - 5.5%

ACP - 3.33%

ACP attributable to matching contributions - 3%

ACP attributable to after-tax employee contributions - 0.33%

NHCEs:

ADP - 8%

ACP - 2.63%

ACP attributable to matching contributions - 2%

ACP attributable to after-tax employee contributions - 0.63%

Correction:Employer B uses the correction method for a

full year exclusion, described in Appendix A section

.05, to correct the failure to include Employee V in

the plan for the full plan year beginning January 1,

2003. Employer B calculates the corrective QNC to

be made on behalf of Employee V as follows:

Elective deferrals: Employee V was eligible to,

but was not provided with the opportunity to, elect

and make elective deferrals in 2003. Thus, Employer

B must make a QNC to the plan on behalf of Em-

ployee V equal to the missed deferral opportunity for

Employee V- 50% of Employee V’s missed deferral.

The QNC is adjusted for earnings. The missed defer-

ral for Employee V is estimated by using the ADP for

NHCEs for 2003 and multiplying that percentage byEmployee V’s compensation for 2003. Accordingly,

the missed deferral for Employee V, on account of

the employee’s improper exclusion from the plan is

$2,400 (8% x $30,000). The misseddeferral opportu-

nity is $1,200(i.e., 50% x $2,400). Thus, the required

corrective contribution for the failure to provide Em-

ployee V with the opportunity to make elective defer-

rals to the plan is $1,200 (plus earnings).

Matching contributions: Employee V should

have been eligible for, but did not receive an allo-

cation of, employer matching contributions because

Employee V was not provided the opportunity to

make elective deferrals in 2003. Thus, Employer

B must make a QNC to the plan on behalf of Em-

ployee V that is equal to the matching contribution

Employee V would have received had the missed de-

ferral been made. The QNC is adjusted for earnings.

Under the terms of the plan, if Employee V had made

an elective deferral of $2,400 or 8% of compensation

($30,000), the employee would have been entitled to

a matching contribution equal to 100% of first 3%

of Employee V’s compensation ($30,000) or $900.

Accordingly, the contribution required to replace the

missed employer matching contribution is $900 (plus

earnings).

After-tax employee contributions: Employee V

was eligible to, but was not provided with the oppor-

tunityto, elect andmake after-taxemployeecontribu-

tions in 2003. Employer B must make a QNC to theplan equal to the missed opportunity for making af-

ter-taxemployeecontributions forEmployeeV - 40%

of Employee V’s missedafter-tax employee contribu-

tion. The QNC is adjusted for earnings. The missed

after-tax employee contribution for Employee V is

estimated by using the ACP for NHCEs (to the extent

that theACP is attributable to after-tax employee con-

tributions) for 2003 and multiplying that percentage

by Employee V’s compensation for 2003. Accord-

ingly, the missed after-tax employee contribution for

Employee V, on account of the employee’s improper

exclusion from the plan is $189 (0.63% x $30,000).

The missed opportunity to make after-tax employee

contributions to the plan is $76 (40% x $189). Thus,

the required corrective contribution for the failure toprovide Employee V with theopportunityto make the

$189 after-tax employee contribution to the plan is

$76 (plus earnings).

The total required corrective QNC, before ad-

justments for earnings, on behalf of Employee V is

$2,176 ($1,200 for the missed deferral opportunity

plus $900 for the missed matching contribution plus

$76 for the missed opportunity to make after-tax

employee contributions). The required corrective

QNC is further adjusted for earnings.

Example 4:

Employer C maintains a 401(k) plan. The plan

provides for matching contributions for each payroll

period that are equal to 100% of an employee’s elec-

tive deferrals that do not exceed 2% of the eligible

employee’s plan compensation during the payroll pe-

riod. The plan provides for after-tax employee contri-

butions. The after-tax employee contribution cannot

exceed $1,000 for the plan year. The plan provides

that employees who complete one year of service are

eligible to participate in theplan onthe next January 1

or July 1 entry date. Employee X, a nonhighly com-

pensated employee, who met the eligibility require-

ments and should have entered the plan on January

1, 2003 was not offered the opportunity to participate

in the plan. In August of 2003, the error was dis-

covered and Employer C offered Employee X the op-

portunity to make elective deferrals and after-tax employee contributions as of September 1, 2003. Em

ployee X made elective deferrals equal to 4% of th

employee’s plan compensation for each payroll pe

riod from September 1, 2003 through December 31

2003 (resulting in elective deferrals of $400). Em

ployee X’s plan compensation for 2003 was $36,00

($26,000 for the first eight months and $10,000 fo

the last four months). Employer C made matchin

contributions equal to $200 on behalf of Employee X

which is 2% of Employee X’s plan compensation fo

each payroll period from September 1, 2003 throug

December 31, 2003 ($10,000). After being allowe

to participate in the plan, Employee X made $25

of after-tax employee contributions for the 2003 pla

year. The ADP for nonhighly compensated employees for2003was 3% andthe ACP fornonhighly com

pensated employees for 2003 was 2.3%. The AC

attributable to matching contributions for nonhighl

compensated employees for 2003 was 1.8%. Th

ACP attributable to employee contributions for non

highly compensated employees for 2003 was 0.5%.

Correction:

In accordance with section 2.02(1)(a)(ii), Em

ployer C uses the correction method described i

Appendix A section .05 to correct for the failure t

provide Employee X the opportunity to elect an

make elective deferrals and after-tax employee con

tributions, and as a result, not receiving matchin

contributions for a portion of the plan year (Januar

1, 2003 through August 31, 2003). Thus, Employe

C makes a corrective contribution on behalf o

Employee X that satisfies the requirements of sec

tion 2.02(1)(a)(ii). Employer C elects to utilize th

provisions of section 2.02(1)(a)(ii)(E) to determin

Employee X’s compensation for the portion of th

year in which Employee X was not provided th

opportunity to make elective deferrals and after-ta

employee contributions. Thus, for administrativ

convenience, in lieu of using actual plan compen

sation of $26,000 for the period Employee X wa

excluded, Employee X’s annual plan compensatio

2006–22 I.R.B. 976 May 30, 200



is prorated for the eight-month period that the em-

ployee was excluded from participating in the plan.

The corrective contribution is determined as follows:

(1) Corrective contribution for missed deferral:

Employee X was eligible to, but was not provided

with the opportunity to, elect and make elective

deferrals from January 1 through August 31 of 2003.

Employer C must make a corrective contribution to

the plan on behalf of Employee X equal to Employee

X’s missed deferral opportunity for that period - 50%

of Employee X’s missed deferral. From January 1through August 31, 2003. The corrective contribu-

tion is adjusted for earnings. Employee X’s missed

deferral is determined by multiplying the 3% ADP

for nonhighly compensated employees by $24,000

(8/12ths of the employee’s 2003 compensation of

$36,000). Accordingly, the missed deferral is $720.

The missed deferral is not reduced because when

this amount is added to the amount already deferred,

no plan limit (including § 402(g)) was exceeded.

Accordingly, the required corrective contribution is

$360 (i.e., 50% multiplied by the missed deferral

amount of $720). The required corrective contribu-

tion is adjusted for earnings.

(2) Corrective contribution for missed match-

ing contribution: Under the terms of the plan, if

Employee X had made an elective deferral of $720

or 3% of compensation for the period of exclusion

($24,000), the employee would have been entitled

to a matching contribution equal to 2% of $24,000

or $480. The missed matching contribution is not

reduced because no plan limit is exceeded when

this amount is added to the matching contribution

already contributed for the 2003 plan year. Accord-

ingly, the required corrective contribution is $480.

The required corrective contribution is adjusted for

earnings.

(3) Corrective contribution for missed after-tax

employee contribution: Employee X was eligible to,

but was not provided with the opportunity to elect

and make after-tax employee contributions from

January 1 through August 31 of 2003. Employer Cmust make a corrective contribution to the plan on

behalf of Employee X equal to the missed opportu-

nity to make after-tax employee contributions. The

missed opportunity to make after-tax employee con-

tributions is equal to 40% of Employee X’s missed

after-tax employee contributions. The corrective

contribution is adjusted for earnings. The missed

after-tax employee contribution amount is equal to

the 0.5% ACP attributable to employee contributions

for nonhighly compensated employees multiplied

by $24,000 (8/12ths of the employee’s 2003 plan

compensation of $36,000). Accordingly, the missed

after-tax employee contribution amount is $120.

The missed after-tax employee contribution is not

reduced because the sum of $120 and the previouslymade after-tax employee contribution of $250 is less

than the overall plan limit of $1,000. Therefore, the

required corrective contribution is $48 (i.e., 40%

multiplied by the missed after-tax employee con-

tribution of $120). The corrective contribution is


ThetotalrequiredQNC onbehalfof theemployee

is $888 ($360 for the missed deferral opportunity

plus $480 for the missed matching contribution plus

$48 for the missed opportunity to make after-tax

employee contributions).

Example 5:

The facts (including the ADP and ACP data) are

the same as in Example 5, except that it is now deter-

mined that Employee X, after being included in the

plan in 2003, made after-tax employee contributions

of $950.

Correction:

The correction is the same as in Example 4, ex-

cept that the corrective contribution required to re-

place the missed after-tax employee contribution willbe re-calculated to take into account applicable plan

limits in accordance with the provisions of section

2.02(1)(a)(ii)(C). The required corrective contribu-

tion is determined as follows:

Corrective contribution for missed after-tax

employee contribution: The missed after-tax em-

ployee contribution amount is equal to the 0.5%

ACP attributable to after-tax employee contributions

for nonhighly compensated employees multiplied

by $24,000 (8/12ths of the employee’s 2003 plan

compensation of $36,000). The missed after-tax

employee contribution amount, based on this calcu-

lation, is $120. However, the sum of this amount

($120) and the previously made after-tax employee

contribution ($950) is $1,070. Because the plan

limit for after-tax employee contributions is $1,000,

the missed after-tax employee contribution needs

to be reduced by $70, to ensure that the total af-

ter-tax employee contributions comply with the plan

limit. Accordingly, the missed after-tax employee

contribution is $50. ($120-$70), and, the required

corrective contribution is $20 (i.e., 40% multiplied

by the missed after-tax employee contribution of

$50). The corrective contribution is adjusted for

earnings.

Example 6 :

Employer D sponsors a 401(k) plan. The plan has

a one year of service eligibility requirement and pro-

vides for January 1 and July 1 entry dates. Employee

Y, who should have been provided the opportunity toelect and make elective deferrals on January 1, 2003

was not provided the opportunity to elect and make

elective deferrals until July 1, 2003. The employee

made $5,000 in elective deferrals to the plan in 2003.

The employee was a highly compensated employee

with compensation for 2003 of $200,000. Employee

Y’s compensation from January 1 through June 30,

2003 was $100,000. The ADP for highly compen-

sated employees for 2003 was 10%. The ADP for

nonhighly compensated employees for 2003 was 8%.

The § 402(g) limit for deferrals made in 2003 was

$12,000.

Correction:

Corrective contribution for missed deferral: Em-ployee W’s missed deferral is equal to the 10% ADP

for highly compensated employees multiplied by

$100,000 (compensation earned for the portion of

the year in which Employee W was erroneously

excluded, i.e., January 1 through June 30, 2003).

The missed deferral amount, based on this calcula-

tion is $10,000. However, the sum of this amount

($10,000) and the previously made elective con-

tribution ($5,000) is $15,000. The 2003 § 402(g)

limit for elective deferrals is $12,000. In accordance

with the provisions of section 2.02(1)(a)(ii)(B), the

missed deferral needs to be reduced by $3,000, to

ensure that the total elective contribution complies

with the applicable § 402(g) limit. Accordingly, the

missed deferral is $7,000 ($10,000 -$3,000), and the

required corrective contribution is $3,500 (i.e., 50%

multiplied by the missed deferral of $7,000). The

corrective contribution is adjusted for earnings.

Example 7 :

Employer E maintains a 401(k) plan. The plan

provides for matching contributions for each payroll

period that are equal to 100% of an employee’s elec-tive deferrals that do not exceed 2% of the eligible

employee’s plan compensation during the payroll pe-

riod. The plan also provides that the annual limit on

matching contributions is $750. The plan provides

for after-tax employee contributions. The after-tax

employee contribution cannot exceed $1,000 during

a plan year. The plan provides that employees who

complete one year of service are eligible to partic-

ipate in the plan on the next January 1 or July 1

entry date. Employee Z, a nonhighly compensated

employee who met the eligibility requirements and

should have entered the plan on January 1, 2003

was not offered the opportunity to participate in the

plan. In March of 2003, the error was discovered

and Employer E offered the employee an election

opportunity as of April 1, 2003. Employee Z had the

opportunity to make the maximum elective deferrals

and/or after-tax employee contributions that could

have been made under the terms of the plan for the

entire 2003 plan year. The employee made elective

deferrals equal to 3% of the employee’s plan com-

pensation for each payroll period from April 1, 2003

through December 31, 2003 (resulting in elective

deferrals of $960). The employee’s plan compen-

sation for 2003 was $40,000 ($8,000 for the first

three months and $32,000 for the last nine months).

Employer E made matching contributions equal to

$640 for the excluded employee, which is 2% of

the employee’s plan compensation for each payroll

period from April 1, 2003 through December 31,

2003 ($32,000). After being allowed to participatein the plan, the employee made $500 in after-tax

employee contributions. The ADP for nonhighly

compensated employees for 2003 was 3% and the

ACP for nonhighly compensated employees for 2003

was 2.3%. The portion of the ACP attributable to

matching contributions for nonhighly compensated

employees for 2003 was 1.8%. The portion of the

ACP attributable to after-tax employee contributions

for nonhighly compensated employees for 2003 was

0.5%.

Correction:

Employer E uses the correctionmethod forpartial

year exclusions, pursuant to section 2.02(1)(a)(ii), to

correct the failure to include an eligible employee inthe plan. Because Employee Z was given an opportu-

nity to make elective deferralsand after-taxemployee

contributions to the plan for at least the last 9 months

of the plan year (and the amount of the elective defer-

rals or after-tax employee contributions that the em-

ployee had the opportunity to make was not less than

the maximum elective deferrals or after-tax employee

contributions that the employee could have made if

the employee had been given the opportunity to make

elective deferrals and after-tax employee contribu-

tions on January 1, 2003), under the special rule set

forth in section 2.02(1)(a)(ii)(F), Employer E is not

May 30, 2006 977 2006–22 I.R.B.



required to make a corrective contributionfor thefail-

ure to provide the employee with the opportunity to

make either elective deferrals or after-tax employee

contributions. The employer only needs to make a

corrective contribution for the failure to provide the

employee with the opportunity to receive matching

contributions on deferrals that could have been made

during the first 3 months of the plan year. The calcu-

lation of the corrective contribution required to cor-

rect this failure is shown as follows:

The missed matching contribution is determinedby calculating the matching contribution that the

employee would have received had the employee

been provided the opportunity to make elective de-

ferrals during the period of exclusion, i.e., January

1, 2003 through March 31, 2003. Assuming that the

employee elected to defer an amount equal to 3% of

compensation (which is the ADP for the nonhighly

compensated employees for the plan year), then, un-

der the terms of the plan, the employee would have

been entitled to a matching contribution of 2% of

compensation. Pursuant to the provisions of section

2.02(1)(a)(ii)(E), Employer E determines compensa-

tion by prorating Employee Z’s annual compensation

for the portion of the year that Employee Z was not

given the opportunity to make elective deferrals or

after-tax employee contributions. Accordingly, the

required matching contribution for the period of ex-

clusion is obtained by multiplying 2% by Employee

Z’s compensation of $10,000 (3/12ths of the em-

ployee’s 2003 plan compensation of $40,000). Based

on this calculation, the missed matching contribution

is $200. However, when this amount is added to the

matching contribution already received ($640), the

total ($840) exceeds the $750 plan limit on match-

ing contributions by $90. Accordingly, pursuant

to section 2.02(1)(a)(ii)(D), the missed matching

contribution figure is reduced to $110 ($200 minus

$90). The required corrective contribution is $110.

The corrective contribution is adjusted for earnings.

Example 8:Employer G maintains a safe harbor 401(k) plan

that uses a rate of matching contributions to satisfy

the requirements of §401(k)(12). Employee M, a

nonhighly compensated employee who met the eligi-

bility requirements and should have entered the plan

on January 1, 2003, was not offered the opportunity

to defer under the plan and was erroneously excluded

for all of 2003. Employee M’s compensation for

2003 was $20,000.

The plan provides for matching contributions

equal to 100% of elective deferrals that do not ex-

ceed 3% of an employee’s compensation and 50% of

elective deferrals that exceed 3% but do not exceed

5% of an employee’s compensation.

Correction:

In accordance with the provisions of section

2.02(1)(a)(ii)(B), Employee M’s missed deferral on

account of exclusion from the safe harbor 401(k)

plan is 3% of compensation. Thus, the missed defer-

ral is equal to 3% multiplied by $20,000, or $600.

Accordingly, the required corrective contribution for

Employee M’s missed deferral opportunity in 2003

is $300, i.e., 50% of $600. The required matching

contribution, based on the missed deferral of $600, is

$600. The required corrective contribution for Em-

ployee M’s missed matching contribution is $600.

The total required corrective contribution, before ad-

justments for earnings, on behalf of Employee M is

$900 (i.e., $300 for the missed deferral opportunity,

plus $600 for the missed matching contribution).


Example 9:

Same facts as Example 8, except that the planpro-

vides for matching contributions equal to 100% of

elective deferrals that do not exceed 4% of an em-

ployee’s compensation.

Correction:

In accordance with the provisions of section

2.02(1)(a)(ii)(B), Employee M’s missed deferral on


plan is 4% of compensation. The missed deferral is

4% of compensation because the plan provides for

a 100% match for deferrals up to that level of com-

pensation. (See Appendix A .05(2)(c).) Therefore,

in this case, Employee M’s missed deferral is equal

to 4% multiplied by $20,000, or $800. The required

corrective contribution for Employee M’s missed

deferral opportunity in 2003 is $400, i.e., 50% mul-

tiplied by $800. The required matching contribution,

based on the missed deferral of $800, is $800. Thus,

the required corrective contribution for Employee

M’s missed matching contribution is $800. The total

required corrective contribution, before adjustments

for earnings, on behalf of Employee M is $1,200

(i.e., $400 for the missed deferral opportunity plus

$800 for the missed matching contribution). The

corrective contribution is adjusted for earnings.

Example 10:

Same facts as Example 8, exceptthattheplanuses

a rate of nonelective contributions to satisfy the re-

quirements of §401(k)(12) and provides for a non-

elective contribution equal to 3% of compensation.

Correction:

In accordance with the provisions of section2.02(1)(a)(ii)(B), Employee M’s missed deferral on


plan is 3% of compensation. Thus, the missed

deferral is equal to 3% multiplied by $20,000, or

$600. Thus, the required corrective contribution for

Employee M’s missed deferral opportunity in 2003

is $300 (50% of $600). The required nonelective

contribution, based on the plan’s formula of 3% of

compensation for nonelective contributions, is $600.

The total required corrective contribution, before ad-

justments for earnings, on behalf of Employee M is

$900 (i.e., $300 for the missed deferral opportunity,

plus $600 for the missed nonelective contribution).


(2) Exclusion of Eligible Employees Ina Profit-Sharing Plan.

(a) Correction Methods. (i) Appen-

dix A Correction Method. Appendix

A, section .05 sets forth the correction

method for correcting the failure to make

a contribution on behalf of the employ-

ees improperly excluded from a defined

contribution plan or to provide benefit

accruals for the employees improperly

excluded from a defined benefit plan.

In the case of a defined contributio

plan, the correction method is to mak

a contribution on behalf of the exclude

employee. Section 2.02(2)(a)(ii) below

clarifies the correction method in the cas

of a profit-sharing or stock bonus pla

that provides for nonelective contribution

(within the meaning of §1.401(k)–6 an

formerly 1.401(k)–1(g)(10)).

(ii) Additional Requirements for Ap

pendix A Correction Method as applied t

Profit-Sharing Plans. To correct for the ex

clusion of an eligible employee from non

elective contributions in a profit-sharing o

stock bonus plan under the Appendix A

correction method, an allocation amount i

determined for each excluded employee o

the same basis as the allocation amount

were determined for the other employee

under the plan’s allocation formula (e.g

the same ratio of allocation to compensa

tion), taking into account all of the employee’s relevant factors (e.g., compensa

tion) under that formula for that year. Th

employer makes a corrective contributio

on behalf of the excluded employee that i

equal to the allocation amount for the ex

cluded employee. The corrective contribu

tion is adjusted for earnings. If, as a resul

of excluding an employee, an amount wa

improperly allocated to the account bal

ance of an eligible employee who share

in the original allocation of the nonelec

tive contribution, no reduction is made to

the account balance of the employee whshared in the original allocation on accoun

of the improper allocation. (See Exampl

11.)

(iii) Reallocation Correction Method

(A) In General. Subject to the limita

tions set forth in section 2.02(2)(a)(iii)(F

below, in addition to the Appendix A

correction method, the exclusion of a

eligible employee for a plan year from

a profit-sharing or stock bonus plan tha

provides for nonelective contribution

may be corrected using the reallocatio

correction method set forth in this sectio2.02(2)(a)(iii). Under the reallocation cor

rection method, the account balance of th

excluded employee is increased as pro

vided in paragraph (2)(a)(iii)(B) below

the account balances of other employ

ees are reduced as provided in paragrap

(2)(a)(iii)(C) below, and the increases an

reductions are reconciled, as necessary, a

provided in paragraph (2)(a)(iii)(D) below

(See Examples 12 and 13.)

2006–22 I.R.B. 978 May 30, 200



(B) Increase in Account Balance of Ex-

cluded Employee. The account balance

of the excluded employee is increased by

an amount that is equal to the allocation

the employee would have received had the

employee shared in the allocation of the

nonelective contribution. The amount is


(C) Reduction in Account Balances of

Other Employees. (1) The account bal-

ance of each employee who was an eligi-

ble employee who shared in the original

allocation of the nonelective contribution

is reduced by the excess, if any, of (I) the

employee’s allocation of that contribution

over (II) the amount that would have been

allocated to that employee had the failure

not occurred. This amount is adjusted for

earnings taking into account the rules set

forth in section 2.02(2)(a)(iii)(C)(2) and

(3) below. The amount after adjustment

for earnings is limited in accordance withsection 2.02(2)(a)(iii)(C)(4) below.

(2) This paragraph (2)(a)(iii)(C)(2) ap-

plies if most of the employees with account

balances that are being reduced are non-

highly compensated employees. If there

has been an overall gain for the period

from the date of the original allocation of

the contribution through the date of correc-

tion, no adjustment for earnings is required

to the amount determined under section

2.02(2)(a)(iii)(C)(1) for the employee. If

the amount for the employee is being ad-

justed for earnings and the plan permitsinvestment of account balances in more

than one investment fund, for administra-

tive convenience, the reduction to the em-

ployee’s account balance may be adjusted

by the lowest earnings rate of any fund

for the period from the date of the origi-

nal allocation of the contribution through

the date of correction.

(3) If an employee’s account balance

is reduced and the original allocation was

made to more than one investment fund

or there was a subsequent distribution or

transfer from the fund receiving the orig-inal allocation, then reasonable, consis-

tent assumptions are used to determine the

earnings adjustment.

(4) The amount determined in sec-

tion 2.02(2)(a)(iii)(C)(1) for an em-

ployee after the application of section

2.02(2)(a)(iii)(C)(2) and (3) may not ex-

ceed the account balance of the employee

on the date of correction, and the employee

is permitted to retain any distribution made

prior to the date of correction.

(D) Reconciliation of Increases and Re-

ductions. If the aggregate amount of the

increases under section 2.02(2)(a)(iii)(B)

exceeds the aggregate amount of the re-

ductions under section 2.02(2)(a)(iii)(C),

the employer makes a corrective contri-

bution to the plan for the amount of the

excess. If the aggregate amount of the

reductions under section 2.02(2)(a)(iii)(C)

exceeds the aggregate amount of the in-

creases under section 2.02(2)(a)(iii)(B),

then the amount by which each employee’s

account balance is reduced under section

2.02(2)(a)(iii)(C) is decreased on a pro

rata basis.

(E) Reductions Among Multiple Invest-

ment Funds. If an employee’s account bal-

ance is reduced and the employee’s ac-

count balance is invested in more than one

investment fund, then thereduction maybemade from the investment funds selected

in any reasonable manner.

(F) Limitations on Use of Reallo-

cation Correction Method. If any em-

ployee would be permitted to retain

any distribution pursuant to section

2.02(2)(a)(iii)(C)(4), then the realloca-

tion correction method may not be used

unless most of the employees who would

be permitted to retain a distribution are

nonhighly compensated employees.

(b) Examples.

Example 11:

Employer D maintains a profit-sharing plan that

provides for discretionary nonelective employer con-

tributions. The plan provides that the employer’s

contributions are allocated to account balances in the

ratio that each eligible employee’s compensation for

the plan year bears to the compensation of all el-

igible employees for the plan year and, therefore,

the only relevant factor for determining an allocation

is the employee’s compensation. The plan provides

for self-directed investments among four investment

funds and daily valuations of account balances. For

the 2003 plan year, Employer D made a contribu-

tion to the plan of a fixed dollar amount. However,

five employees who met the eligibility requirements

were inadvertently excluded from participating in the

plan. Thecontribution resulted in an allocationon be-

half of each of the eligible employees, other than the

excluded employees, equal to 10% of compensation.

Most of the employees who received allocations un-

der the plan for the year of the failure were nonhighly

compensated employees. No distributions have been

made from the plan since 2003. If the five excluded

employees had shared in the original allocation, the

allocation made on behalf of each employee would

have equaled9% of compensation. Theexcludedem-

ployees began participating in the plan in the 2004

plan year.

Correction:

Employer D uses the Appendix A correction

method to correct the failure to include the five

eligible employees. Thus, Employer D makes a

corrective contribution to the plan. The amount

of the corrective contribution on behalf of the five

excluded employees for the 2003 plan year is equal

to 10% of compensation of each excluded employee,the same allocation that was made for other eligible

employees, adjusted for earnings. The excluded

employees receive an allocation equal to 10% of

compensation (adjusted for earnings) even though,

had the excluded employees originally shared in the

allocation for the 2003 contribution, their account

balances, as well as those of the other eligible em-

ployees, would have received an allocation equal to

only 9% of compensation.

Example 12:

The facts are the same as in Example 11.

Correction:

Employer D uses the reallocation correction

method to correct the failure to include the five

eligible employees. Thus, the account balances are

adjusted to reflect what would have resulted from

the correct allocation of the employer contribution

for the 2003 plan year among all eligible employees,

including the five excluded employees. The inclu-

sion of the excluded employees in the allocation of

that contribution would have resulted in each eligi-

ble employee, including each excluded employee,

receiving an allocation equal to 9% of compensation.

Accordingly, the account balance of each excluded

employee is increased by 9% of the employee’s 2003

compensation, adjusted for earnings. The account

balance of each of the eligible employees other

than the excluded employees is reduced by 1% of

the employee’s 2003 compensation, adjusted for earnings. Employer D determines the adjustment

for earnings using the earnings rate of each eligible

employee’s excess allocation (using reasonable, con-

sistent assumptions). Accordingly, for an employee

who shared in the original allocation and directed

the investment of the allocation into more than one

investment fund or who subsequently transferred a

portion of a fund that hadbeen credited with a portion

of the 2003 allocation to another fund, reasonable,

consistent assumptions are followed to determine

the adjustment for earnings. It is determined that

the total of the initially determined reductions in

account balances exceeds the total of the required

increases in account balances. Accordingly, these

initially determined reductions are decreased prorata so that the total of the actual reductions in ac-

count balances equals the total of the increases in the

account balances, and Employer D does not make

any corrective contribution. The reductions from the

account balances are made on a pro rata basis among

all of the funds in which each employee’s account

balance is invested.

Example 13:


May 30, 2006 979 2006–22 I.R.B.



Correction:

The correction is the same as in Example 12, ex-

cept that, because most of the employees whose ac-

count balances are being reduced are nonhighly com-

pensated employees, for administrative convenience,

Employer D uses the earnings rate of the fund with

the lowest earnings rate for the period of the failure

to adjust the reduction to each account balance. It is

determined that the aggregate amount (adjusted for

earnings) by which the account balances of the ex-

cluded employees is increased exceeds the aggregateamount (adjusted for earnings) by which the other

employees’ account balances are reduced. Accord-

ingly, Employer D makes a contribution to the plan

in an amount equal to the excess. The reduction from

account balances is made on a pro rata basis among

all of the funds in which each employee’s account


.03 Vesting Failures.

(1) Correction Methods. (a) Contribu-

tion Correction Method. A failure in a de-

fined contribution plan to apply the proper

vesting percentage to an employee’s ac-

count balance that results in forfeiture of

too large a portion of the employee’s ac-count balance may be corrected using the

contribution correction method set forth

in this paragraph. The employer makes

a corrective contribution on behalf of the

employee whose account balance was im-

properly forfeited in an amount equal to

the improper forfeiture. The corrective

contribution is adjusted for earnings. If,

as a result of the improper forfeiture, an

amount wasimproperly allocated to the ac-

count balance of another employee, no re-

duction is made to the account balance of

that employee. (See Example 14.)(b) Reallocation Correction Method. In

lieu of the contribution correction method,

in a defined contribution plan under which

forfeitures of account balances are reallo-

cated among the account balances of the

other eligible employees in the plan, a fail-

ure to apply the proper vesting percentage

to an employee’s account balance which

results in forfeiture of too large a portion

of the employee’s account balance may

be corrected under the reallocation correc-

tion method set forth in this paragraph.

A corrective reallocation is made in ac-

cordance with the reallocation correction

method set forth in section 2.02(2)(a)(iii),

subject to the limitations set forth in sec-

tion 2.02(2)(a)(iii)(F). In applying section

2.02(2)(a)(iii)(B), the account balance of

the employee who incurred the improper

forfeiture is increased by an amount equal

to the amount of the improper forfeiture

and the amount is adjusted for earnings.

In applying section 2.02(2)(a)(iii)(C)(1),

the account balance of each employee who

shared in the allocation of the improper

forfeiture is reduced by the amount of the

improper forfeiture that was allocated to

that employee’s account. The earnings

adjustments for the account balances that

are being reduced are determined in accor-

dance with sections 2.02(2)(a)(iii)(C)(2)

and (3) and the reductions after adjust-

ments for earnings are limited in accor-

dance with section 2.02(2)(a)(iii)(C)(4). In

accordance with section 2.02(2)(a)(iii)(D),

if the aggregate amount of the increases

exceeds the aggregate amount of the re-

ductions, the employer makes a corrective

contribution to the plan for the amount of

the excess. In accordance with section

2.02(2)(a)(iii)(D), if the aggregate amount

of the reductions exceeds the aggregate

amount of the increases, then the amount

by which each employee’s account bal-

ance is reduced is decreased on a pro ratabasis. (See Example 15.)

(2) Examples.

Example 14:

Employer E maintains a profit-sharing plan that

provides for nonelective contributions. The plan pro-

vides for self-directed investments among four in-

vestment funds and daily valuation of account bal-

ances. The plan provides that forfeitures of account

balances are reallocated among the account balances

of other eligible employees on the basis of compen-

sation. During the 2003 plan year, Employee R ter-

minated employment with Employer E and elected

and received a single-sum distribution of the vested

portion of his account balance. No other distribu-tions have been made since 2003. However, an in-

correct determination of Employee R’s vested per-

centage was made resulting in Employee R receiv-

ing a distribution of less than the amount to which he

was entitled under the plan. The remaining portion

of Employee R’s account balance was forfeited and

reallocated (and these reallocations were not affected

by the limitations of § 415). Most of the employees

who received allocations of the improper forfeiture

were nonhighly compensated employees.

Correction:

Employer E uses the contribution correction

method to correct the improper forfeiture. Thus, Em-

ployer E makes a contribution on behalf of Employee

R equal to the incorrectly forfeited amount (adjusted

for earnings) and Employee R’s account balance is

increased accordingly. No reduction is made from

the account balances of the employees who received

an allocation of the improper forfeiture.

Example 15:


Correction:

Employer E uses the reallocation correction

method to correct the improper forfeiture. Thus,

Employee R’s account balance is increased by the

amount that was improperly forfeited (adjusted fo

earnings). The account of each employee who share

in the allocation of the improper forfeiture is reduce

by the amount of the improper forfeiture that wa

allocated to that employee’s account (adjusted fo

earnings). Because most of the employees whos

account balances are being reduced are nonhighl

compensated employees, for administrative conve

nience, Employer E uses the earnings rate of th

fund with the lowest earnings rate for the period o

the failure to adjust the reduction to each accounbalance. It is determined that the amount (adjuste

for earnings) by which the account balance of Em

ployee R is increased exceeds the aggregate amoun

(adjusted for earnings) by which the other employ

ees’ account balances are reduced. Accordingl

Employer E makes a contribution to the plan in a

amount equal to the excess. The reduction from th

account balances is made on a pro rata basis amon

all of the funds in which each employee’s accoun


.04 § 415 Failures.

(1) Failures Relating to a § 415(b) Ex

cess.

(a) Correction Methods. (i) Return o

Overpayment Correction Method. Over

payments as a result of amounts being pai

in excess of the limits of § 415(b) may

be corrected using the return of Overpay

ment correction method set forth in thi

paragraph (1)(a)(i). The employer take

reasonable steps to have the Overpaymen

(with appropriate interest) returned by th

recipient to the plan and reduces futur

benefit payments (if any) due to the em

ployee to reflect § 415(b). To the exten

the amount returned by the recipient is les

than the Overpayment, adjusted for earnings at the plan’s earnings rate, then th

employer or another person contributes th

difference to the plan. In addition, in ac

cordance with section 6.05 of this revenu

procedure, the employer must notify th

recipient that the Overpayment was not el

igible for favorable tax treatment accorde

to distributions from qualified plans (and

specifically, was not eligible for tax-fre

rollover). (See Examples 18 and 19.)

(ii) Adjustment of Future Payment

Correction Method. (A) In General. I

addition to the return of overpayment correction method, in the case of plan benefit

that are being distributed in the form o

periodic payments, Overpayments as

result of amounts being paid in excess o

the limits in § 415(b) may be corrected

by using the adjustment of future pay

ments correction method set forth in thi

paragraph (1)(a)(ii). Future payments t

the recipient are reduced so that they d

not exceed the § 415(b) maximum limi

2006–22 I.R.B. 980 May 30, 200



and an additional reduction is made to

recoup the Overpayment (over a period

not longer than the remaining payment

period) so that the actuarial present value

of the additional reduction is equal to the

Overpayment plus interest at the interest

rate used by the plan to determine actuarial

equivalence. (See Examples 16 and 17.)

(B) Joint and Survivor Annuity Pay-

ments. If the employee is receiving pay-

ments in the form of a joint and survivor

annuity, with the employee’s spouse to re-

ceive a life annuity upon the employee’s

death equal to a percentage (e.g., 75%) of

the amount being paid to the employee, the

reduction of future annuity payments to re-

flect § 415(b) reduces the amount of bene-

fits payable during the lives of both the em-

ployee and spouse, but any reduction to re-

coup Overpayments made to the employee

does not reduce the amount of the spouse’s

survivor benefit. Thus, the spouse’s bene-fit will be based on the previous specified

percentage (e.g., 75%) of the maximum

permitted under § 415(b), instead of the re-

duced annual periodic amount payable to

the employee.

(C) Overpayment Not Treated as an Ex-

cess Amount. An Overpayment corrected

under this adjustment of future payment

correction method is not treated as an Ex-

cess Amount as defined in section 5.01(3)

of this revenue procedure.

(b) Examples.

Example 16 :

Employer F maintains a defined benefit plan

funded solely through employer contributions. The

plan provides that the benefits of employees are

limited to the maximum amount permitted under

§ 415(b), disregarding cost-of-living adjustments un-

der§ 415(d)afterbenefit payments have commenced.

At the beginning of the 1998 plan year, Employee

S retired and started receiving an annual straight

life annuity of $140,000 from the plan. Due to an

administrative error, the annual amount received by

Employee S for 1998 included an Overpayment of

$10,000 (because the § 415(b)(1)(A) limit for 1998

was $130,000). This error was discovered at the

beginning of 1999.

Correction:

Employer F uses the adjustment of future pay-

ments correction method to correct the failure to sat-

isfy the limit in § 415(b). Future annuity benefit pay-

ments to Employee S are reduced so that they do not

exceed the § 415(b) maximum limit, and, in addition,

Employee S’s future benefit payments from the plan

are actuarially reduced to recoup the Overpayment.

Accordingly, Employee S’s future benefit payments

from the plan are reduced to $130,000 and further re-

duced by $1,000 annually for life, beginning in 1999.

The annual benefit amount is reduced by $1,000 an-

nually for life because, for Employee S, the actuarial

present value of a benefit of $1,000 annually for life

commencing in 1999 is equal to the sum of $10,000

and interest at the rate used by the plan to determine

actuarial equivalence beginning with the date of the

first Overpayment and ending with the date the re-

duced annuity payment begins. Thus, Employee S’s

remaining benefit payments are reduced so that Em-

ployee S receives $129,000 for 1999, and for each

year thereafter.

Example 17 :

The facts are the same as in Example 16 .

Correction:

Employer F uses the adjustments of future pay-

ments correction method to correct the § 415(b) fail-

ure, by recouping the entire excess payment made in

1998 from Employee S’s remaining benefit payments

for 1999. Thus, Employee S’s annual annuity benefit

for 1999 is reduced to $119,400 to reflect the excess

benefit amounts (increased by interest) that were paid

from the plan to Employee S during the 1998 plan

year. Beginning in 2000, Employee S begins to re-

ceive annual benefit payments of $130,000.

Example 18:

The facts are the same as in Example 16 , except

that the benefit was paid to Employee S in the form

of a single-sum distribution in 1998, which exceeded

the maximum § 415(b) limits by $110,000.

Correction:

Employer F uses the return of overpayment cor-

rection method to correct the § 415(b) failure. Thus,

Employer F notifies Employee S of the $110,000

Overpayment and that the Overpayment was not

eligible for favorable tax treatment accorded to dis-

tributions from qualified plans (and, specifically, was

not eligible for tax-free rollover). The notice also

informs Employee S that the Overpayment (withinterest at the rate used by the plan to calculate the

single-sum payment) is owed to the plan. Employer

F takes reasonable steps to have the Overpayment

(with interest at the rate used by the plan to calculate

the single-sum payment) paid to the plan. Employee

S pays the $110,000 (plus the requested interest) to

the plan. It is determined that the plan’s earnings

rate for the relevant period was 2 percentage points

more than the rate used by the plan to calculate

the single-sum payment. Accordingly, Employer F

contributes the difference to the plan.

Example 19:


Correction:

Employer F uses the return of overpayment cor-

rection method to correct the § 415(b) failure. Thus,

Employer F notifies Employee S of the $110,000

Overpayment and that the Overpayment was not

eligible for favorable tax treatment accorded to dis-

tributions from qualified plans (and, specifically, was

not eligible for tax-free rollover). The notice also

informs Employee S that the Overpayment (with

interest at the rate used by the plan to calculate the

single-sum payment) is owed to the plan. Employer

F takes reasonable steps to have the Overpayment

(with interest at the rate used by the plan to calculate

the single-sum payment) paid to the plan. As a result

of Employer F’s recovery efforts, some, but not

all, of the Overpayment (with interest) is recovered

from Employee S. It is determined that the amount

returned by Employee S to the plan is less than the

Overpayment adjusted for earnings at the plan’s

earnings rate. Accordingly, Employer F contributes

the difference to the plan.

(2) Failures Relating to a § 415(c) Ex-

cess.(a) Correction Methods. (i) Appendix

A Correction Method. Appendix A, sec-

tion .08 sets forth the correction method for

correcting the failure to satisfy the § 415(c)

limits on annual additions.

(ii) Forfeiture Correction Method. In

addition to the Appendix A correction

method, the failure to satisfy § 415(c)

with respect to a nonhighly compensated

employee (A) who in the limitation year

of the failure had annual additions consist-

ing of both (I) either elective deferrals or

employee after-tax contributions or both

and (II) either matching or nonelective

contributions or both, (B) for whom the

matching and nonelective contributions

equal or exceed the portion of the em-

ployee’s annual addition that exceeds the

limits under § 415(c) (“§ 415(c) excess”)

for the limitation year, and (C) who has

terminated with no vested interest in the

matching and nonelective contributions

(and has not been reemployed at the time

of the correction), may be corrected by

using the forfeiture correction methodset forth in this paragraph. The § 415(c)

excess is deemed to consist solely of the

matching and nonelective contributions.

If the employee’s § 415(c) excess (ad-

justed for earnings) has previously been

forfeited, the § 415(c) failure is deemed to

be corrected. If the § 415(c) excess (ad-

justed for earnings) has not been forfeited,

that amount is placed in an unallocated

account, similar to the suspense account

described in § 1.415–6(b)(6)(iii), to be

used to reduce employer contributions in

succeeding year(s) (or if the amount wouldhave been allocated to other employees

who were in the plan for the year of the

failure if the failure had not occurred, then

that amount is reallocated to the other

employees in accordance with the plan’s

allocation formula). Note that while this

correction method will permit more fa-

vorable tax treatment of elective deferrals

for the employee than the Appendix A

correction method, this correction method

May 30, 2006 981 2006–22 I.R.B.



could be less favorable to the employee in

certain cases, for example, if the employee

is subsequently reemployed and becomes

vested. (See Examples 20 and 21.)

(iii) Return of Overpayment Correc-

tion Method. A failure to satisfy § 415(c)

that includes a distribution of the § 415(c)

excess attributable to nonelective contri-

butions and matching contributions may

be corrected using the return of Overpay-

ment correction method set forth in this

paragraph. The employer takes reasonable

steps to have the Overpayment (i.e., the

distribution of the § 415(c) excess adjusted

for earnings to the date of the distribution),

plus appropriate interest from the date of

the distribution to the date of the repay-

ment, returned by the employee to the

plan. To the extent the amount returned by

the employee is less than the Overpayment

adjusted for earnings at the plan’s earnings

rate, then the employer or another personcontributes the difference to the plan. The

Overpayment, adjusted for earnings at the

plan’s earnings rate to the date of the re-

payment, is to be placed in an unallocated



used to reduce employer contributions

in succeeding year(s) (or if the amount

would have been allocated to other eligi-

ble employees who were in the plan for

the year of the failure if the failure had not

occurred, then that amount is reallocated

to the other eligible employees in accor-

dance with the plan’s allocation formula).

In addition, the employer must notify

the employee that the Overpayment was

not eligible for favorable tax treatment

accorded to distributions from qualified

plans (and, specifically, was not eligible

for tax-free rollover).

(b) Examples.

Example 20:

Employer G maintains a 401(k) plan. The pla

provides for nonelective employer contribution

elective deferrals, and employee after-tax contr

butions. The plan provides that the nonelectiv

contributions vest under a 5-year cliff vesting sched

ule. The plan provides that when an employe

terminates employment, the employee’s nonveste

account balance is forfeited five years after a dis

tribution of the employee’s vested account balanc

and that forfeitures are used to reduce employe

contributions. For the 1998 limitation year, thannual additions made on behalf of two nonhighl

compensated employees in the plan, Employees

and U, exceeded the limit in § 415(c). For the 199

limitation year, Employee T had § 415 compensatio

of $60,000, and, accordingly, a § 415(c)(1)(B) lim

of $15,000. Employee T made elective deferrals an

employee after-tax contributions. For the 1998 lim

tation year, Employee U had § 415 compensation o

$40,000, and, accordingly, a § 415(c)(1)(B) limit o

$10,000. Employee U made elective deferrals. Also

on January 1, 1999, Employee U, who had thre

years of service with Employer G, terminated hi

employment and received his entire vested accoun

balance (which consisted of his elective deferrals

The annual additions for Employees T and U con

sisted of:

T U

Nonelective Contributions $ 7,500 $ 4,500

Elective Deferrals 10,000 5,800

After-tax Contributions 500 0

Total Contributions $18,000 $10,300

§ 415(c) Limit $15,000 $10,000

§ 415(c) Excess $ 3,000 $ 300

Correction:

Employer G uses the Appendix A correctionmethod to correct the § 415(c) excess with respect

to Employee T (i.e., $3,000). Thus, a distribution

of plan assets (and corresponding reduction of the

account balance) consisting of $500 (adjusted for

earnings) of employee after-tax contributions and

$2,500 (adjusted for earnings) of elective deferrals is

made to Employee T. Employer G uses the forfeiture

correction method to correct the § 415(c) excess

with respect to Employee U. Thus, the § 415(c)

excess is deemed to consist solely of the nonelective

contributions. Accordingly, Employee U’s non-

vested account balance is reduced by $300 (adjusted

for earnings) which is placed in an unallocated ac-

count, similar to the suspense account described in

§ 1.415–6(b)(6)(iii), to be used to reduce employer

contributions in succeeding year(s). After correction,

it is determined that the ADP and ACP tests for 1998

were satisfied.

Example 21:

Employer H maintains a 401(k) plan. The plan

provides for nonelective employer contributions,

matching contributions and elective deferrals. The

plan provides for matching contributions that are

equal to 100% of an employee’s elective defer-

rals that do not exceed 8% of the employee’s plan

compensation for the plan year. For the 1998 lim-

itation year, Employee V had § 415 compensation

of $50,000, and, accordingly, a § 415(c)(1)(B) limit

of $12,500. During that limitation year, the annualadditions for Employee V totaled $15,000, consisting

of $5,000 in elective deferrals, a $4,000 matching

contribution (8% of $50,000), and a $6,000 non-

elective employer contribution. Thus, the annual

additions for Employee V exceeded the § 415(c)

limit by $2,500.

Correction:

Employer H uses the Appendix A correction

method to correct the § 415(c) excess with respect

to Employee V (i.e., $2,500). Accordingly, $1,000

of the unmatched elective deferrals (adjusted for

earnings) are distributed to Employee V. The remain-

ing $1,500 excess is apportioned equally between

the elective deferrals and the associated matching

employer contributions, so Employee V’s account

balance is further reduced by distributing to Em-

ployee V $750 (adjusted for earnings) of the elective

deferrals and forfeiting $750 (adjusted for earnings)

of the associated employer matching contributions.

The forfeited matching contributions are placed in an

unallocated account; similar to the suspense account

described in § 1.415–6(b)(6)(iii), to be used to reduce

employer contributions in succeeding year(s). After

correction, it is determined that the ADP and ACP

tests for 1998 were satisfied.

.05 Correction of Other Overpaymen

Failures.An Overpayment, other than one de

scribed in section 2.04(1) (relating to

§ 415(b) excess) or section 2.04(2) (re

lating to a § 415(c) excess), may be cor

rected in accordance with this section 2.05

An Overpayment from a defined benefi

plan is corrected in accordance with th

rules in section 2.04(1). An Overpaymen

from a defined contribution plan is cor

rected in accordance with the rules in sec

tion 2.04(2)(a)(iii).

.06 § 401(a)(17) Failures.

(1) Reduction of Account BalancCorrection Method. The allocation o

contributions or forfeitures under a de

fined contribution plan for a plan year o

the basis of compensation in excess o

the limit under § 401(a)(17) for the pla

year may be corrected using the reduc

tion of account balance correction metho

set forth in this paragraph. The accoun

balance of an employee who received a

allocation on the basis of compensation i

2006–22 I.R.B. 982 May 30, 200



excess of the § 401(a)(17) limit is reduced

by this improperly allocated amount (ad-

justed for earnings). If the improperly

allocated amount would have been allo-

cated to other employees in the year of the

failure if the failure had not occurred, then

that amount (adjusted for earnings) is real-

located to those employees in accordance

with the plan’s allocation formula. If the

improperly allocated amount would not

have been allocated to other employees

absent the failure, that amount (adjusted

for earnings) is placed in an unallocated



used to reduce employer contributions in

succeeding year(s). For example, if a plan

provides for a fixed level of employer con-

tributions for each eligible employee, and

the plan provides that forfeitures are used

to reduce future employer contributions,

the improperly allocated amount (adjustedfor earnings) would be used to reduce

future employer contributions. (See Ex-

ample 20.) If a payment was made to an

employee and that payment was attribut-

able to an improperly allocated amount,

then it is an Overpayment defined in sec-

tion 5.01(6) of this revenue procedure that

must be corrected (see sections 2.04 and

2.05).

(2) Example.

Example 22:

Employer J maintains a money purchase pension

plan. Under the plan, an eligible employee is entitled

to an employer contribution of 8% of the employee’s

compensation up to the § 401(a)(17) limit ($200,000

for 2003). During the 2003 plan year, an eligible

employee, Employee W, inadvertently was credited

with a contribution based on compensation above the

§ 401(a)(17) limit. Employee W’s compensation for

2003 was $220,000. Employee W received a contri-

bution of $17,600 for 2003 (8% of $220,000), rather

than the contribution of $16,000 (8% of $200,000)

provided by the plan for that year, resulting in an im-

proper allocation of $1,600.

Correction:

The § 401(a)(17) failure is corrected using the re-

duction of account balance method by reducing Em-ployee W’s account balance by $1,600 (adjusted for

earnings) and crediting that amount to an unallocated

account, similar to the suspense account described in

§ 1.415–6(b)(6)(iii), to be used to reduce employer

contributions in succeeding year(s).

.07 Correction by Amendment .

(1) § 401(a)(17) Failures. (a) Contri-

bution Correction Method. In addition

to the reduction of account balance cor-

rection method under section 2.06 of this

Appendix B, an employer may correct a

§ 401(a)(17) failure for a plan year under

a defined contribution plan by using the

contribution correction method set forth in

this paragraph. The employer contributes

an additional amount on behalf of each of

the other employees (excluding each em-

ployee for whom there was a § 401(a)(17)

failure) who received an allocation for the

year of the failure, amending the plan (as

necessary) to provide for the additional al-

location. The amount contributed for an

employee is equal to the employee’s plan

compensation for the year of the failure

multiplied by a fraction, the numerator of

which is the improperly allocated amount

made on behalf of the employee with the

largest improperly allocated amount, and

the denominator of which is the limit under

§ 401(a)(17) applicable to the year of the

failure. The resulting additional amount

for each of the other employees is adjusted

for earnings. (See Example 21.)(b) Examples.

Example 23:


Correction:

Employer J corrects the failure under VCP using

the contribution correction method by (1) amend-

ing the plan to increase the contribution percentage

for all eligible employees (other than Employee

W) for the 2003 plan year and (2) contributing an

additional amount (adjusted for earnings) for those

employees for that plan year. To determine the

increase in the plan’s contribution percentage (and

the additional amount contributed on behalf of eacheligible employee), the improperly allocated amount

($1,600) is divided by the § 401(a)(17) limit for 2003

($200,000). Accordingly, the plan is amended to

increase the contribution percentage by 0.8 percent-

age points ($1,600/$200,000) from 8% to 8.8%. In

addition, each eligible employee for the 2003 plan

year (other than Employee W) receives an additional

contribution of 0.8% multiplied by that employee’s

plan compensation for 2003. This additional contri-

bution is adjusted for earnings.

(2) Hardship Distribution Failures and

Plan Loan Failures. (a) Plan Amend-

ment Correction Method. The Operational

Failure of making hardship distributions

to employees under a plan that does notprovide for hardship distributions may

be corrected using the plan amendment

correction method set forth in this para-

graph. The plan is amended retroactively

to provide for the hardship distributions

that were made available. This paragraph

does not apply unless (i) the amendment

satisfies § 401(a), and (ii) the plan as

amended would have satisfied the qualifi-

cation requirements of § 401(a) (including

the requirements applicable to hardship

distributions under § 401(k), if applicable)

had the amendment been adopted when

hardship distributions were first made

available. (See Example 24.) The Plan

Amendment Correction Method is also

available for the Operational Failure of

permitting plan loans to employees un-

der a plan that does not provide for plan

loans. The plan is amended retroactively

to provide for the plan loans that were

made available. This paragraph does not

apply unless (i) the amendment satisfies

§ 401(a), and (ii) the plan as amended

would have satisfied the qualification

requirements of § 401(a) (and the re-

quirements applicable to plan loans under

§ 72(p)) had the amendment been adopted

when plan loans were first made available.

(b) Example.

Example 24:

Employer K, a for-profit corporation, maintainsa 401(k) plan. Although plan provisions in 2002 did

not provide for hardship distributions, beginning in

2002 hardship distributions of amounts allowed to

be distributed under § 401(k) were made currently

and effectively available to all employees (within the

meaning of § l.401(a)(4)–4). Thestandardused to de-

termine hardship satisfied the deemed hardship dis-

tribution standards in § 1.401(k)–1(d)(2). Hardship

distributions were made to a number of employees

during the 2002 and 2003 plan years, creating an Op-

erational Failure. The failure was discoveredin 2004.

Correction:

Employer K corrects the failure under VCP by

adopting a plan amendment, effective January 1,2002, to provide a hardship distribution option that

satisfies the rules applicable to hardship distributions

in § 1.401(k)–1(d)(2). The amendment provides that

the hardship distribution option is available to all

employees. Thus, the amendment satisfies § 401(a),

and the plan as amended in 2004 would have sat-

isfied § 401(a) (including § 1.401(a)(4)–4 and the

requirements applicable to hardship distributions

under § 401(k)) if the amendment had been adopted

in 2002.

(3) Early Inclusion of Otherwise Eligi-

ble Employee Failure. (a) Plan Amend-

ment Correction Method. The Operational

Failure of including an otherwise eligible

employee in the plan who either (i) has

not completed the plan’s minimum age

or service requirements, or (ii) has com-

pleted the plan’s minimum age or service

requirements but became a participant in

the plan on a date earlier than the appli-

cable plan entry date, may be corrected

by using the plan amendment correction

method set forth in this paragraph. The

plan is amended retroactively to change

May 30, 2006 983 2006–22 I.R.B.



the eligibility or entry date provisions to

provide for the inclusion of the ineligible

employee to reflect the plan’s actual op-

erations. The amendment may change the

eligibility or entry date provisions with

respect to only those ineligible employees

that were wrongly included, and only to

those ineligible employees, provided (i)

the amendment satisfies § 401(a) at the

time it is adopted, (ii) the amendment

would have satisfied § 401(a) had the

amendment been adopted at the earlier

time when it is effective, and (iii) the em-

ployees affected by the amendment are

predominantly nonhighly compensated

employees.

(b) Example

Example 25:

Employer L maintains a 401(k) plan applicable

to all of its employees who have at least six months

of service. The plan is a calendar year plan. The

plan provides that Employer L will make matchingcontributions basedupon an employee’s salaryreduc-

tion contributions. In 2001, it is discovered that all

four employees who were hired by Employer L in

2000 were permitted to make salary reduction con-

tributions to the plan effective with the first weekly

paycheck after they were employed. Three of thefour

employees are nonhighly compensated. Employer L

matched these employees’ salary reduction contribu-

tions in accordance with the plan’s matching contri-

bution formula. Employer L calculates the ADP and

ACP tests for 2000 (taking into account the salary re-

duction and matching contributions that were made

for these employees) and determines that the tests

were satisfied.

Correction:

Employer L corrects the failure under SCP by

adopting a plan amendment, effective for employees

hired on or after January 1, 2000, to provide that there

is no service eligibility requirement under the plan

and submitting the amendment to the Service for a

determination letter.

SECTION 3. EARNINGS

ADJUSTMENT METHODS AND

EXAMPLES

.01 Earnings Adjustment Methods. (1)

In general. (a) Under section 6.02(4)(a)

of this revenue procedure, whenever theappropriate correction method for an Op-

erational Failure in a defined contribution

plan includes a corrective contribution or

allocation that increases one or more em-

ployees’ account balances (now or in the

future), the contribution or allocation is

adjusted for earnings and forfeitures. This

section 3 provides earnings adjustment

methods (but not forfeiture adjustment

methods) that may be used by an em-

ployer to adjust a corrective contribution

or allocation for earnings in a defined

contribution plan. Consequently, these

earnings adjustment methods may be used

to determine the earnings adjustments

for corrective contributions or allocations

made under the correction methods in sec-

tion 2 and under the correction methods

in Appendix A. If an earnings adjustment

method in this section 3 is used to adjust

a corrective contribution or allocation,

that adjustment is treated as satisfying the

earnings adjustment requirement of sec-

tion 6.02(4)(a) of this revenue procedure.

Other earnings adjustment methods, dif-

ferent from those illustrated in this section

3, may also be appropriate for adjusting

corrective contributions or allocations to

reflect earnings.

(b) Under the earnings adjustment

methods of this section 3, a corrective

contribution or allocation that increases anemployee’s account balance is adjusted to

reflect an “earnings amount” that is based

on the earnings rate(s) (determined under

section 3.01(3)) for the period of the fail-

ure (determined under section 3.01(2)).

The earnings amount is allocated in accor-

dance with section 3.01(4).

(c) The rule in section 6.02(5)(a) of this

revenue procedure permitting reasonable

estimates in certain circumstances applies

for purposes of this section 3. For this pur-

pose, a determination of earnings made in

accordance with the rules of administra-tive convenience set forth in this section

3 is treated as a precise determination of

earnings. Thus, if the probable difference

between an approximate determination of

earnings and a determination of earnings

under this section 3 is insignificant and the

administrative cost of a precise determina-

tion would significantly exceed the prob-

able difference, reasonable estimates may

be used in calculating the appropriate earn-

ings.

(d) This section 3 does not apply to

corrective distributions or corrective re-ductions in account balances. Thus, for

example, while this section 3 applies in

increasing the account balance of an im-

properly excluded employee to correct

the exclusion of the employee under the

reallocation correction method described

in section 2.02(2)(a)(iii)(B), this section

3 does not apply in reducing the account

balances of other employees under the re-

allocation correction method. (See section

2.02(2)(a)(iii)(C) for rules that apply t

the earnings adjustments for such reduc

tions.) In addition, this section 3 does no

apply in determining earnings adjustment

under the one-to-one correction metho

described in section 2.01(1)(b)(iii).

(2) Period of the Failure. (a) Genera

Rule. For purposes of this section 3, th

“period of the failure” is the period from

the date that the failure began through th

date of correction. For example, in thecas

of an improper forfeiture of an employee’

account balance, the beginning of the pe

riod of the failure is the date as ofwhich th

account balance was improperly reduced

(b) Rules for Beginning Date for Ex

clusion of Eligible Employees from Plan

(i) General Rule. In the case of an exclu

sion of an eligible employee from a plan

contribution, the beginning of the perio

of the failure is the date on which con

tributions of the same type (e.g., electivdeferrals, matching contributions, or dis

cretionary nonelective employer contribu

tions) were made for other employees fo

the year of the failure. In the case of a

exclusion of an eligible employee from an

allocation of a forfeiture, the beginnin

of the period of the failure is the date o

which forfeitures were allocated to othe

employees for the year of the failure.

(ii) Exclusion from a 401(k) or (m

Plan. For administrative convenience

for purposes of calculating the earning

rate for corrective contributions for a planyear (or the portion of the plan year) dur

ing which an employee was improperl

excluded from making periodic electiv

deferrals or employee after-tax contribu

tions, or from receiving periodic matchin

contributions, the employer may treat th

date on which the contributions woul

have been made as the midpoint of th

plan year (or the midpoint of the portio

of the plan year) for which the failur

occurred. Alternatively, in this case, th

employer may treat the date on which th

contributions would have been made as thfirst date of the plan year (or the portion o

the plan year) during which an employe

was excluded, provided that the earning

rate used is one half of the earnings rat

applicable under section 3.01(3) for th

plan year (or the portion of the plan year

for which the failure occurred.

(3) Earnings Rate. (a) General Rule

For purposes of this section 3, the earn

ings rate generally is based on the invest

2006–22 I.R.B. 984 May 30, 200



ment results that would have applied to the

corrective contribution or allocation if the

failure had not occurred.

(b) Multiple Investment Funds. If a

plan permits employees to direct the in-

vestment of account balances into more

than one investment fund, the earnings rate

is based on the rate applicable to the em-

ployee’s investment choices for the period

of the failure. For administrative conve-

nience, if most of the employees for whom

the corrective contribution or allocation is

made are nonhighly compensated employ-

ees, the rate of return of the fund with the

highest earnings rate under the plan for the

period of the failure may be used to de-

termine the earnings rate for all corrective

contributions or allocations. If the em-

ployee had not made any applicable in-

vestment choices, the earnings rate may be

based on the earnings rate under the plan

as a whole (i.e., the average of the ratesearned by all of the funds in the valua-

tion periods during the period of the failure

weighted by the portion of the plan assets

invested in the various funds during the pe-

riod of the failure).

(c) Other Simplifying Assumptions.

For administrative convenience, the earn-

ings rate applicable to the corrective con-

tribution or allocation for a valuation

period with respect to any investment fund

may be assumed to be the actual earnings

rate for the plan’s investments in that fund

during that valuation period. For exam-ple, the earnings rate may be determined

without regard to any special investment

provisions that vary according to the size

of the fund. Further, the earnings rate

applicable to the corrective contribution

or allocation for a portion of a valuation

period may be a pro rata portion of the

earnings rate for the entire valuation pe-

riod, unless the application of this rule

would result in either a significant under-

statement or overstatement of the actual

earnings during that portion of the valua-

tion period.(4) Allocation Methods. (a) In General.

For purposes of this section 3, the earnings

amount generally may be allocated in ac-

cordance with any of the methods set forth

in this paragraph (4). The methods under

paragraph (4)(c), (d), and (e) are intended

to be particularly helpful where corrective

contributions are made at dates between

the plan’s valuation dates.

(b) Plan Allocation Method. Under

the plan allocation method, the earnings

amount is allocated to account balances

under the plan in accordance with the

plan’s method for allocating earnings as if

the failure had not occurred. (See Exam-

ple 26.)

(c) Specific Employee Allocation

Method. Under the specific employee

allocation method, the entire earnings

amount is allocated solely to the account

balance of the employee on whose behalf

the corrective contribution or allocation

is made (regardless of whether the plan’s

allocation method would have allocated

the earnings solely to that employee). In

determining the allocation of plan earn-

ings for the valuation period during which

the corrective contribution or allocation is

made, the corrective contribution or allo-

cation (including the earnings amount) is

treated in the same manner as any other contribution under the plan on behalf of

the employee during that valuation period.

Alternatively, where the plan’s allocation

method does not allocate plan earnings

for a valuation period to a contribution

made during that valuation period, plan

earnings for the valuation period during

which the corrective contribution or al-

location is made may be allocated as if

that employee’s account balance had been

increased as of the last day of the prior

valuation period by the corrective contri-

bution or allocation, including only thatportion of the earnings amount attribut-

able to earnings through the last day of the

prior valuation period. The employee’s

account balance is then further increased

as of the last day of the valuation period

during which the corrective contribution

or allocation is made by that portion of the

earnings amount attributable to earnings

after the last day of the prior valuation

period. (See Example 27.)

(d) Bifurcated Allocation Method. Un-

der the bifurcated allocation method, the

entire earnings amount for the valuationperiods ending before the date the correc-

tive contribution or allocation is made is

allocated solely to the account balance of

the employee on whose behalf the cor-

rective contribution or allocation is made.

The earnings amount for the valuation pe-

riod during which the corrective contribu-

tion or allocation is made is allocated in ac-

cordance with the plan’s method for allo-

cating other earnings for that valuation pe-

riod in accordance with section 3.01(4)(b).

(See Example 28.)

(e) Current Period Allocation Method.

Under the current period allocation

method, the portion of the earnings amount

attributable to the valuation period dur-

ing which the period of the failure begins

(“first partial valuation period”) is allo-

cated in the same manner as earnings for

the valuation period during which the cor-

rective contribution or allocation is made

in accordance section 3.01(4)(b). The

earnings for the subsequent full valuation

periods ending before the beginning of

the valuation period during which the cor-

rective contribution or allocation is made

are allocated solely to the employee for

whom the required contribution should

have been made. The earnings amount

for the valuation period during which the

corrective contribution or allocation is

made (“second partial valuation period”)is allocated in accordance with the plan’s

method for allocating other earnings for

that valuation period in accordance with

section 3.01(4)(b). (See Example 29.)

.02 Examples.

Example 26 :

Employer L maintains a profit-sharing plan that

provides only for nonelective contributions. The plan

has a single investment fund. Under the plan, assets

are valued annually (the last day of the plan year) and

earnings for the year are allocated in proportion to ac-

count balances as ofthe last dayof theprioryear, after

reduction for distributions during the current year but

without regard to contributions received during the

current year (the “prior year account balance”). Plan

contributionsfor 1997 were made onMarch31, 1998.

OnApril20, 2000, EmployerL determinesthatan op-

erational failure occurred for 1997because Employee

X was improperly excluded from the plan. Employer

L decides to correct the failure by using the Appen-

dix A correction method for the exclusion of an el-

igible employee from nonelective contributions in a

profit-sharing plan. Under this method, Employer L

determines that this failure is corrected by making a

contribution on behalf of Employee X of $5,000 (ad-

justed for earnings). The earnings rate under the plan

for 1998 was +20%. The earnings rate under the plan

for 1999 was +10%. On May 15, 2000, when Em-

ployer L determines that a contribution to correct for the failure will be made on June 1, 2000, a reasonable

estimate of the earnings rate under the plan from Jan-

uary 1, 2000 to June 1, 2000 is +12%.

Earnings Adjustment on the Corrective Contribution:

The $5,000 corrective contribution on behalf of

Employee X is adjusted to reflect an earnings amount

based on the earnings rates for the period of the fail-

ure (March 31, 1998 through June 1, 2000) and the

earnings amount is allocated using the plan alloca-

tion method. Employer L determines that a pro rata

simplifying assumption may be used to determine the

May 30, 2006 985 2006–22 I.R.B.



earnings rate for the period from March 31, 1998 to

December 31, 1998, because that rate does not sig-

nificantly understate or overstate the actual earnings

for that period. Accordingly, Employer L determines

that the earnings rate for that period is 15% (9/12 of

the plan’s 20% earnings rate for the year). Thus, ap-

plicable earnings rates under the plan during the pe

riod of the failure are:

Time Periods Earnings Rate

3/31/98 - 12/31/98 (First Partial Valuation Period) +15%

1/1/99 - 12/31/99 +10%

1/1/00 - 6/1/00 (Second Partial Valuation Period) +12%

If the $5,000 corrective contribution had been

contributed for Employee X on March 31, 1998,

(1) earnings for 1998 would have been increased

by the amount of the earnings on the additional

$5,000 contribution from March 31, 1998 through

December 31, 1998, and would have been allo-

cated as 1998 earnings in proportion to the prior

year (December 31, 1997) account balances, (2)

Employee X’s account balance as of December 31,

1998, would have been increased by the additional

$5,000 contribution, (3) earnings for 1999 would

have been increased by the 1999 earnings on the

additional $5,000 contribution (including 1998 earn-

ings thereon) allocated in proportion to the prior

year (December 31, 1998) account balances along

with other 1999 earnings, and (4) earnings for 2000would have been increased by the earnings on the

additional $5,000 (including 1998 and 1999 earnings

thereon) from January 1 to June 1, 2000, and would

be allocated in proportion to the prior year (Decem-

ber 31, 1999) account balances along with other

2000 earnings. Accordingly, the $5,000 corrective

contribution is adjusted to reflect an earnings amount

of $2,084 ($5,000[(1.15)(1.10)(1.12)–1]) and the

earnings amount is allocated to the account balances

under the plan allocation method as follows:

(a) Each account balance that shared in the allo-

cation of earnings for 1998is increased, as of Decem-

ber 31, 1998, by its appropriate share of the earnings

amount for 1998, $750 ($5,000(.15)).

(b) Employee X’s account balance is increased,

as of December 31, 1998, by $5,000.

(c) The resulting December 31, 1998 account

balances will share in the 1999 earnings, including

the $575 for 1999 earnings included in the corrective

contribution ($5,750(.10)), to determine the accountbalances as of December 31, 1999. However, each

account balance other than Employee X’s account

balance has already shared in the 1999 earnings,

excluding the $575. Accordingly, Employee X’s ac

count balance as of December 31, 1999 will includ

$500 of the 1999 portion of the earnings amoun

based on the $5,000 corrective contribution allocate

to Employee X’s account balance as of Decembe

31, 1998 ($5,000(.10)). Then each account balanc

that originally shared in the allocation of earning

for 1999 (i.e., excluding the $5,500 additions t

Employee X’s account balance) is increased by it

appropriate share of the remaining 1999 portion o

the earnings amount, $75.

(d) The r esulting December 31, 1999account ba

ances (including the $5,500 additions to Employe

X’s account balance) will share in the 2000 portio

of the earnings amount based on the estimated Jan

uary 1, 2000 to June 1, 2000 earnings included in thcorrective contribution equal to $759 ($6,325(.12)

(See Table 1.)

TABLE 1

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation Period Earnings 15% 7501

All 12/31/1997 Account Balances4

1999 Earnings 10% 5752

Employee X ($500)/All 12/31/1998

Account Balances ($75)4

Second Partial Valuation Period

Earnings

12% 7593

All 12/31/1999 Account Balances

(including Employee X’s $5,500)4

Total Amount Contributed $7,084

1$5,000 x 15%

2$5,750($5,000 +750) x 10%

3$6,325($5,000 +750 +575) x 12%

4

After reduction for distributions during the year for which earning are being determined but without regard to contributions received during the year for which earnings are being determined.

Example 27 :



The earnings amount on the corrective contribu-

tion is the same as in Example 23, but the earnings

amount is allocated using the specific employee al-

location method. Thus, the entire earnings amount

for all periods through June 1, 2000 (i.e., $750 for

March 31, 1998 to December 31, 1998, $575 for

1999, and $759 for January 1, 2000 to June 1, 2000)

is allocated to Employee X. Accordingly, Employer

L makes a contribution on June 1, 2000 to the plan

of $7,084 ($5,000(1.15)(1.10)(1.12)). Employee X’s

account balance as of December 31, 2000 is increase

by $7,084. Alternatively, Employee X’s account bal

ance as of December 31, 1999 is increased by $6,32

($5,000(1.15)(1.10)), which shares in the allocatio

of earnings for 2000, and Employee X’s account bal

ance as of December 31, 2000 is increased by the re

maining $759. (See Table 2.)

2006–22 I.R.B. 986 May 30, 200



TABLE 2






Employee X

1999 Earnings 10% 5752

Employee X


Earnings

12% 7593 Employee X


1$5,000 x 15%

2$5,750($5,000 +750) x 10%

3$6,325($5,000 +750 +575) x 12%

Example 28:





amount is allocated using the bifurcated allocation

method. Thus, the earnings for the first partial val-

uation period (March 31, 1998 to December 31,1998) and the earnings for 1999 are allocated to

Employee X. Accordingly, Employer L makes a

contribution on June 1, 2000 to the plan of $7,084

($5,000(1.15)(1.10)(1.12)). Employee X’s account

balance as of December 31, 1999 is increased by

$6,325 ($5,000(1.15)(1.10)); and the December 31,

1999 account balances of employees (including Em-ployee X’s increased account balance) will share

in estimated January 1, 2000 to June 1, 2000 earn-

ings on the corrective contribution equal to $759

($6,325(.12)). (See Table 3.)

TABLE 3






Employee X

1999 Earnings 10% 5752

Employee X


Earnings

12% 7593

12/31/99 Account Balances (including

Employee X’s $6,325)4


1$5,000 x 15%

2$5,750($5,000 +750) x 10%

3$6,325($5,000 +750 +575) x 12%

4After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year.

May 30, 2006 987 2006–22 I.R.B.



Example 29:





amount is allocated using the current period alloca-

tion method. Thus, the earnings for the first partial

valuation period (March 31, 1998 to December 31,

1998) are allocated as 2000 earnings. Accordingly,

Employer L makes a contribution on June 1, 2000 to

the plan of $7,084 ($5,000 (1.15)(1.10)(1.12)). Em-

ployee X’s account balance as of December 31, 1999

is increased by the sum of $5,500 ($5,000(1.10)) and

the remaining 1999 earnings on the corrective contri-

bution equal to $75 ($5,000(.15)(.10)). Further, both

(1) the estimated March 31, 1998 to December 31,

1998 earnings on the corrective contribution equal

to $750 ($5,000(.15)) and (2) the estimated January

1, 2000 to June 1, 2000 earnings on the corrective

contribution equal to $759 ($6,325(.12)) are treate

in the same manner as 2000 earnings by allocatin

these amounts to the December 31, 2000 account ba

ances of employees in proportion to account balance

as of December 31, 1999 (including Employee X’

increased account balance). (See, Table 4.) Thu

Employee X is allocated the earnings for the full val

uation period during the period of the failure.

TABLE 4





First Partial Valuation Period Earnings 15% 7501 12/31/99 Account Balances (including

Employee X’s $5,575)4

1999 Earnings 10% 5752

Employee X

Second Partial Valuation PeriodEarnings

12% 7593 12/31/99 Account Balances (includingEmployee X’s $5,575)

4


1$5,000 x 15%

2$5,750($5,000 +750) x 10%

3$6,325($5,000 +750 +575) x 12%

4After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year for

which earnings are being determined.

2006–22 I.R.B. 988 May 30, 200



APPENDIX C

VCP CHECKLIST

IS YOUR SUBMISSION COMPLETE?

INSTRUCTIONS

The Service will be able to respond more quickly to your VCP request if it is carefully prepared and complete. To ensure that your

request is in order, use this checklist. Answer each question in the checklist by inserting yes, no, or N/A, as appropriate, in the

blank next to the item. Sign and date the checklist (as taxpayer or authorized representative) and include it in the submission as

provided in section 11.09 of Rev. Proc. 2006–27 (Hereafter, all section references are to Rev. Proc. 2006–27.)

You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request,

substantive consideration of your submission will be deferred until a completed checklist is received.

TAXPAYER’S NAME

TAXPAYER’S I.D. NO.

PLAN NAME & NO.

ATTORNEY/P.O.A.

The following items relate to all submissions:

1. Does the submission consist solely of a failure to amend a plan timely for (a) good faith plan amendments

for EGTRRA, (b) plan amendments for the final and temporary regulations under § 401(a)(9) or (c) interim

amendments? If yes, please proceed to Appendix F. (See section 11.01 and sections 4.06 and 10.08.)

2. Have you included an explanation of how and why the failure(s) arose, including a description of the

administrative procedures for the plan in effect at the time the failure(s) occurred? (See section 11.02(3)

and (4).)

3. Have you included a detailed description of the method for correcting the failure(s) identified in your

submission? This description must include, for example, the number of employees affected and the expected

cost of correction (both of which may be approximated if the exact number cannot be determined at

the time of the request), the years involved, and calculations or assumptions the Plan Sponsor used to

determine the amounts needed for correction. In lieu of providing correction calculations with respect to

each employee affected by a failure, you may submit calculations with respect to a representative sample

of affected employees. However, the representative sample calculations must be sufficient to demonstrate

each aspect of the correction method proposed. Note that each step of the correction method must be

described in narrative form. (See section 11.02(5).)

4. Have you described the earnings or interest methodology (indicating computation period and basis for

determining earnings or interest rates) that will be used to calculate earnings or interest on any corrective

contributions or distributions? (As a general rule, the interest rate (or rates) earned by the plan during the

applicable period(s) should be used in determining the earnings for corrective contributions or distributions.)

(See section 11.02(6).)

5. Have you submitted specific calculations for either affected employees or a representative sample of

affected employees? (See section 11.02(7).)

6. Have you described the method that will be used to locate and notify former employees or, if there are

no former employees affected by the failure(s) or the correction(s), provided an affirmative statementto that effect? (See section 11.02(8).)

7. Have you provided a description of the administrative measures that have been or will be implemented to

ensure that the same failure(s) do not recur? (See section 11.02(9).)

8. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the plan is not currently

under an Employee Plans examination? (See section 11.02(10).)

9. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the Plan Sponsor is not

under an Exempt Organizations examination? (See section 11.02(10).)

May 30, 2006 989 2006–22 I.R.B.



10. Have you included a statement that neither the plan nor the Plan Sponsor has been a party to an

abusive tax avoidance transaction? Alternatively, have you provided a statement identifying the abusive tax

avoidance transaction(s) to which the plan or the Plan Sponsor has been a party? (See section 11.02(11).)

11. If the submission includes a failure related to Transferred Assets, have you included a description of the

related employer transaction, including the date of the employer transaction and the date the assets were

transferred to the plan? (See section 11.02(12).)

12. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable)

relevant to the failure(s) and method(s) of correction? (See section 11.03(2).)

13. Have you included the original signature of the sponsor or the sponsor’s authorized representative?

(See section 11.06.)

14. Have you included a Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821)?

Note: Authorization to represent a plan sponsor before the Service using Form 2848 is limited to attorneys,

certified public accountants, enrolled agents, and enrolled actuaries. (See section 11.07.)

15. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the Plan

Sponsor? (See section 11.08.)

16. Have you designated your submission for a Qualified Plan, 403(b) Plan, SEP, SIMPLE IRA Plan, or

Orphan Plan? In addition, the submission should indicate if the submission is a Group Submission, an

Anonymous Submission, a nonamender submission, a multiemployer or multiple employer plan submission.

(See section 11.10.)

17. Have you submitted the Appendix E acknowledgement letter? (See section 11.11.)

18. If you are requesting a waiver of the excise tax under § 4974 of the Code, have you included the request,

and, if applicable, an explanation supporting the request for any affected owner-employee or 10 percent

owner? (See section 6.09(2).)

19. If you are requesting relief of the excise tax under §§ 4972 or 4979, have you included the request and a

detailed description of the failure? (See sections 6.09 (3) & (4).)

20. If you are you requesting that participant loans being corrected under this revenue procedure not be

treated as distributions pursuant to § 72(p), have you included the request and a detailed description of

the failure? Alternatively, if you are requesting that participant loans being corrected under this revenue

procedure be recognized as distributions in the year of correction, instead of the year that the deemed

distribution occurred under § 72(p), have you included the request and a detailed description of the failure?

(See sections 6.02(6) and 6.07.)

21. Where applicable, have you submitted an application for a determination letter and Form 8717 together

with a check for the user fee made payable to the U.S. Treasury? (See sections 10.06 and 11.03(3).)

22. If the plan is currently being considered in an unrelated determination letter application, have you

included a statement to that effect? (See section 11.02(12).)

23. Have you included a copy of the first three pages of the Form 5500 (which includes employee census

information) and the applicable Financial Information Schedule of the most recently filed Form 5500 series

return? Note: If a Form 5500 is not applicable, insert N/A and furnish the name of the plan, and the census

information required of Form 5500 series filers. (See section 11.03(1).)

24. Where applicable have you included a check for the VCP compliance fee, and, if applicable, a separate

check for the determination letter fee each made payable to the U.S. Treasury? (See sections 10.06 and

12.01).)

25. If your submission is for a terminating Orphan Plan, have you included a request for a waiver of the VCP

fee? (See section 12.02(3).)

26. Have you assembled your submission as described in section 11.14?

2006–22 I.R.B. 990 May 30, 200



If you inserted “N/A” for any item enter explanation:

Signature Date

Title or Authority

Typed or printed name of person signing checklist

May 30, 2006 991 2006–22 I.R.B.



APPENDIX D

SAMPLE FORMATS FOR VCP SUBMISSIONS

The following sample submission formats may be photocopied and used as part of a VCP submission.

I. SAMPLE FORMAT FOR VCP SUBMISSION FOR QUALIFIED PLAN

Indicate Plan Type, and whether submission is a Group or Anonymous Submission

Identifica tion of Failures

A complete description, for each failure, which includes (but is not limited to):

1) A description of the failure

2) Years in which the failure occurred (including closed years)

3) Number of participants affected (may be estimated)

4) A description of the administrative procedures in effect at the time the failures occurred

5) Explanation of how and why the failures occurred

Description of Proposed Method of Correction

A complete description of the correction proposed, for each failure, which includes (but is not limited to):

1) a complete description of the method of correction proposed for correcting the failure and if multiple steps are involved, a

narrative of the steps involved in implementing the proposed correction

2) the number of employees affected (may be estimated)

3) the expected cost of correction (may be estimated)

4) the years involved

5) calculations or assumptions used to determine the amounts needed for correction

6) a description of the methodology that will be used to calculate earnings or actuarial adjustments on any corrective

contributions or distributions (indicating the computation periods and the basis for determining earnings or actuarial

adjustments in accordance with section 6.02(4) of Rev. Proc. 2006–27)

7) specific calculations, sufficient to demonstrate each aspect of the correction method proposed, for each affected employee

or a representative sample of affected employees8) the method that will be used to locate and notify former employees and beneficiaries, or an affirmative statement that no

former employees or beneficiaries were affected by the failures or will be affected by the correction

9) if a submission includes a failure that refers to Transferred Assets and the failure occurred prior to the transfer, a description

of the transaction (including the dates of the employer change and the plan transfer)

10) any request (with supporting rationale) for either not treating participant loans as distributions pursuant to § 72(p) or that

deemed distributions under § 72(p) be recognized in the year of correction

11) any specific request (with supporting rationale) for relief from excise taxes under §§ 4972, 4974 or 4979

12) for Orphan Plans only, any specific request for relief (with supporting rationale) from imposition of the Voluntary

Compliance fee

Description of Administrative Procedures

A description of the administrative measures that have been or will be implemented to ensure that the failure(s) will not recur Sample Statement regarding status of examination:

To the best of the Plan Sponsor’s knowledge (1) the subject Plan is not currently under examination of either an Employee Plans

Form 5500 series return or other Employee Plans examination, (2) the Plan Sponsor is not under an Exempt Organizations

examination (that is, an examination of a Form 990 series return or other Exempt Organizations examination, (3) neither the

Employer nor any of its representatives have received verbal or written notification from the TEGE Division of an impending

examination or of any impending referral for such examination, nor is the Plan in Appeals or litigation for any issues raised in

such an examination, and (4) the subject Plan is not currently under investigation by the Criminal Investigation Division of the

Internal Revenue Service.

2006–22 I.R.B. 992 May 30, 200



Sample Statement (if applicable) regarding status of any determination letter application not related to the VCP submission

The Plan Sponsor applied for and has currently pending an application for a favorable determination letter with the Service

filed on (inser t date).

Sample Statement regarding abusive tax avoidance transactions if neither the Plan nor the Plan Sponsor was a party to

such a transaction (note - if either the plan or plan sponsor was a party to such a transaction, a statement describing the

transaction will be required)

Neither the Plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction as defined in section 4.13(2) of

Rev. Proc. 2006–27.Sample Penalty of Perjury:

Under penalties of perjury, I declare that I have examined this submission, including accompanying documents and, to the best of

my knowledge and belief, the facts and information presented in support of this submission are true, correct and complete.

Name and Title (Executed by Plan Sponsor)

Required Documentation:

Copy of plan document (or relevant plan provisions, i.e., those provisions relating to the failure(s) described in the

submission)

Copy of the first three pages of the most recently filed Form 5500 series return and the applicable Financial Information

Schedule. (In the case of a terminated plan, the Form 5500 must be the one filed for the plan year prior to the plan year for which the Final Form 5500 return was filed.)

Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable

A statement that neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction (as

defined in section 4.13(2)) or a brief identification of any abusive tax avoidance transaction to which the plan or the Plan

Sponsor has been a party

Determination letter application

Your submission must include a determination letter application on the appropriate Form 5300 series application form if you

are correcting a nonamender failure. A nonamender failure is a failure to amend the plan to reflect a change in a qualification

requirement within the plan’s applicable remedial amendment period. A change in a qualification requirement includes a change

arising from a statutory change, issuance of regulations or other guidance published in the Internal Revenue Bulletin. If you are

correcting the nonamender failure through the adoption of an amendment designated by the Service as a model amendment or theadoption of a prototype or volume submitter plan for which you have reliance on the plan’s opinion or advisory letter as provided

in Rev. Proc. 2006–6, 2006–1 I.R.B. 204, no determination letter application is necessary. If your plan is terminating, or if you are

correcting a failure other than a nonamender failure through a plan amendment and you are submitting your VCP submission

during the same year the plan’s remedial amendment period is expiring, you may request a determination letter on the plan. When

submitting for a determination letter with a VCP submission, please submit the following documents:

a copy of the amendment (or entire plan, in the case of a nonamender failure)

the appropriate Form 5300 series application form, and

Form 8717 and the appropriate determination letter user fee

Assembling your submission

Please assemble your submission package in the order provided in section 11.14 of this revenue procedure (and partially

reproduced below). The sample format above may be used as a tool for preparing the information required for your submission.

1. If applicable, Form 8717, User Fee for Employee Plan Determination Letter Request , and the check for the determination

letter user fee made payable to the U.S. Treasury

2. Determination letter application (Form 5300 series), if applicable

May 30, 2006 993 2006–22 I.R.B.



3. Submission signed by the Plan Sponsor or Plan Sponsor’s authorized representative, with a check for the VCP fee made

payable to the U.S. Treasury attached to the front of the submission letter. The submission should include the following:

• Type of plan (or group of plans) being submitted

• Description of the failures (if the failures relate to Transferred Assets, include a description of the related employer trans-

action)

• An explanation of how and why the failures arose

• Description of the method for correcting failures, including earnings methodology (if applicable) and supporting com-

putations (if applicable)

• Description of the method used to locate or notify former employees affected by the failures or corrections and if noformer employees are affected by the failures or corrections, then the letter should affirmatively state that position when

addressing this issue

• Description of the administrative procedures that have been or will be implemented to ensure that the failures do not recur

• Whether a request that participant loans corrected under this revenue procedure not be treated as distributions §72(p) is

being made and supporting rationale for such request. Alternatively, whether a request that participant loans corrected

under this revenue procedure should be treated as distributions in the year of correction is being made and supporting

rationale for such request.

• Whether relief from imposition of the excise taxes under §§ 4972, 4974 or 4979 is being requested, and the supporting

rationale for such relief

• If the plan is an Orphan Plan, whether relief from the VCP application fee is being requested, and the supporting rationale

for such relief

• A statement on whether the plan is being considered in an unrelated determination letter application (if applicable)

• Statement that the plan is not Under Examination

• Statement that the Plan Sponsor is not under an Exempt Organizations examination

• A statement that neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction (as defined

in section 4.13(2)) or a brief identification of any abusive tax avoidance transaction to which the plan or the Plan Sponsor

has been a party

• Penalty of perjury statement

4. Completed and signed checklist (see Appendix C of Rev. Proc. 2006–27)

5. Acknowledgement Letter, if desired (see Appendix E of Rev. Proc. 2006–27)

6. Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable

7. Form 5500, (first three pages and the applicable Financial Information Schedule) or equivalent information

8. Copy of opinion or determination letter (if applicable)9. Relevant plan document language or plan document (if applicable)

10. Any other items that may be relevant to the submission

2006–22 I.R.B. 994 May 30, 200



II. SAMPLE FORMAT FOR VCP SUBMISSION FOR QUALIFIED PLAN WHERE THE

ONLY ISSUE IS A NONAMENDER FAILURE

Indicate Plan Type, and whether submission is a Group or Anonymous Submission

Identification of Failures

1) Indicate which tax legislation is the subject of the submission: (check all that apply)

The Employee Retirement Security Act of 1974 (ERISA)

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

The Deficit Reduction Act of 1984 (DEFRA)

The Retirement Equity Act of 1984 (REA)

The Tax Reform Act of 1986 (TRA ’86)

The Unemployment Compensation Act of 1992 (UCA)

The Omnibus Budget Reconciliation Act of 1993 (OBRA ’93)

The Uruguay Round Agreements Act; the Uniformed Services Employment and Reemployment Rights Act of 1994; the

Small Business Job Protection Act of 1996; the Taxpayer Relief Act of 1997; the Internal Revenue Service Restructuring

and Refor m Act of 1998; and the Community Renewal Tax Relief Act of 2000 (collectively known as “GUST”)

The good faith plan amendments for the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”),

within the period described in Notice 2001–42 including those changes listed in Notice 2005–5

The final and temporary regulations under § 401(a)(9) of the Internal Revenue Code

interim amendments pursuant to section 5 of Rev. Proc. 2005–66

Please List:

EGTRRA

Other:

Please list:

2) Years in which the failure(s) occurred (including closed years)

3) A description of the administrative procedures in effect at the time the failures occurred

4) Explanation of how and why the failures occurred


Include appropriate determination letter application (see “Required Documentation,” below).

Description of Administrative Procedures

A description of the administrative measures that have been or will be implemented to ensure that the failure(s) will not recur

May 30, 2006 995 2006–22 I.R.B.



Sample Statement regarding status of examination:

To the best of the Plan Sponsor’s knowledge (1) the subject Plan is not currently under examination of either an Employee Plans

Form 5500 series return or other Employee Plans examination, (2) the Plan Sponsor is not under an Exempt Organizations

examination (that is, an examination of a Form 990 series return or other Exempt Organizations examination, (3) neither the

Employer nor any of its representatives have received verbal or written notification from the TEGE Division of an impending

examination or of any impending referral for such examination, nor is the Plan in Appeals or litigation for any issues raised in

such an examination, and (4) the subject Plan is not currently under investigation by the Criminal Investigation Division of the

Internal Revenue Service.

Sample Statement regarding abusive tax avoidance transactions if neither the Plan nor the Plan Sponsor was a party to

such a transaction (note - if either the plan or plan sponsor was a party to such a transaction, a statement describing the

transaction will be required)


Rev. Proc. 2006–27.

Sample Statement (if applicable) regarding status of any determination letter application not related to the VCP submission

The Plan Sponsor applied for and has currently pending an application for a favorable determination letter with the Service

filed on (insert date).

Sample Penalty of Perjury:


my knowledge and belief, the facts and information presented in support of this submission are true, correct, and complete.

Name and Title (Executed by Plan Sponsor)

Required Documentation:

Appropriate determination letter application form (i.e., Form 5300 series)

Copy of plan document in effect prior to proposed amendment

Copy of the proposed plan amendment

Form 8717 and determination user fee

Any other materials required to be submitted with determination letter application (see Forms 5300, 5310 &

Schedule Q, and 5303)

Copy of the first three pages of the most recently filed Form 5500 series return and the applicable Financial InformationSchedule (In the case of a terminated plan, include the Form 5500 filed for the plan year prior to the plan year for which the

Final Form 5500 return was filed.)

Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable

A statement that neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction (as

defined in section 4.13(2)) or a brief identification of any abusive tax avoidance transaction to which the plan or the Plan

Sponsor has been a party

Copy of determination letter most recently issued with respect to the plan

Your submission must include a determination letter application on the appropriate Form 5300 series application form if you

are correcting a nonamender failure. A nonamender failure is a failure to amend the plan to reflect a change in a qualification

requirement within the plan’s applicable remedial amendment period. A change in a qualification requirement includes a change

arising from a statutory change, issuance of regulations or other guidance published in the Internal Revenue Bulletin. If you arecorrecting the nonamender failure through the adoption of an amendment designated by the Service as a model amendment or the

adoption of a prototype or volume submitter plan for which you have reliance on the plan’s opinion or advisory letter as provided

in Rev. Proc. 2006–6, 2006–1 I.R.B. 204, no determination letter application is necessary. If your plan is terminating, or if you are

correcting a failure other than a nonamender failure through a plan amendment and you are submitting your VCP submission

during the same year the plan’s remedial amendment period is expiring, you may request a determination letter on the plan.

2006–22 I.R.B. 996 May 30, 200



Assembling your submission

If you are preparing your submission using the sample format provided above, please assemble your submission package in

the following order:

1. If applicable, Form 8717, User Fee for Employee Plan Determination Letter Request , and the check for the determination

letter user fee made payable to the U.S. Treasury

2. Determination letter application (Form 5300 series), if applicable

3. Submission, with a check for the VC fee made payable to the U.S. Treasury attached to the front of the submission

letter, and including:

• Identification of Failures

• Description of Proposed Method of Correction

• Description of Administrative Procedures

• Statement regarding status of examination

• Statement regarding abusive tax avoidance transactions

• Statement regarding unrelated determination letter application (if applicable)

• Penalty of Per jury statement

4. Completed and signed Checklist (see Appendix C of Rev. Proc. 2006–27)

5. Acknowledgement Letter, if desired (see Appendix E of Rev. Proc. 2006–27)

6. Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable

7. Form 5500 (first three pages and the applicable Financial Information Schedule) or equivalent information including:

number of participants in the plan and total amount of plan assets

8. Copy of opinion or determination letter

9. Copy of plan document in effect prior to the proposed plan amendment(s)

10. Copy of the proposed plan amendments

May 30, 2006 997 2006–22 I.R.B.



APPENDIX E Acknowledgeme nt Letter

[ ]

[ ]

[ ]

[ ]

INSERT NAME AND

ADDRESS OF PLAN

SPONSOR OR

POWER OF

ATTORNEY AT LEFT

Plan Name: [Insert plan name and plan number]

Control #: [To be completed by the Internal Revenue Service]

Received Date: [To be completed by the Internal Revenue Service]

The Internal Revenue Service, Employee Plans Voluntary Compliance, has received your VCP Submission for the

above-captioned plan. Your request has been assigned the control number listed above. This number should be referred to

in any communication to us concerning your submission.

You will be contacted when the case is assigned to an agent. If you are not contacted within 120 days from the date of this letter,

and need to inquire about the status of your case, please call (202) 283–9888 (not a toll-free number). Please leave a message withthe name of the Plan, the Control Number, your name and a phone number where you can be reached.

Thank you for your cooperation.

2006–22 I.R.B. 998 May 30, 200



APPENDIX FVCP SAMPLE SUBMISSION FOR INTERIM NONAMENDERS

PLAN SPONSOR’S NAME

PLAN SPONSOR’S I.D. NO.

PLAN SPONSOR’S ADDRESS:

PLAN NAME & NO.

PLAN SPONSOR REPRESENTATIVE NAME

PLAN SPONSOR REPRESENTATIVE ADDRESS:

Identification of Failures:

The Plan identified above was not amended timely for: (check failure(s) that apply):

the good faith plan amendments for the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), within

the period described in Notice 2001–42 including those changes listed in Notice 2005–5

the final and temporary regulations under § 401(a)(9) of the Internal Revenue Code

interim amendments pursuant to section 5 of Rev. Proc. 2005–66

Please List:


The Plan Sponsor adopted amendments required to correct the failure(s) identified above. The signed and dated amendments are

attached to this submission.

Description of steps taken to ensure that the failure does not recur [INSERT below]

Plan Sponsor’s representations:

To the best of my knowledge (1) the subject Plan is not currently under examination of either an Employee Plans Form 5500

series return or other Employee Plans examination, (2) the Plan Sponsor is not under an Exempt Organizations examination (that

is, an examination of a Form 990 series return or other Exempt Organizations examination, (3) neither the Employer nor any of itsrepresentatives have received verbal or written notification from the TEGE Division of an impending examination or of any

impending referral for such examination, nor is the Plan in Appeals or litigation for any issues raised in such an examination, and

(4) the subject Plan is not currently under investigation by the Criminal Investigation Division of the Internal Revenue Service.


Rev. Proc. 2006–27.

May 30, 2006 999 2006–22 I.R.B.



The Plan Sponsor will neither attempt to amortize, deduct, or recover from the Internal Revenue Service any compliance

fee paid in connection with this compliance statement, nor receive any Federal tax benefit on account of payment of such

compliance fee.


my knowledge and belief, the facts and information presented in support of this submission are true, correct and complete.

Signed:

Name (printed):

Title:

Plan Sponsor’s documents:

In addition to the corrective plan amendments described in the “Proposed Method of Correction,” the Plan Sponsor encloses

the following documents with this submission:

• VC fee of $375 made payable to the U.S. Treasury

• Copy of the first three pages of the most recently filed Form 5500 series return and the applicable Financial Information Sched-

ule. (In the case of a terminated plan, the Form 5500 must be the one filed for the plan year prior to the plan year for which the

Final Form 5500 return was filed)

• Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable

Enforcement Resolution:

The Internal Revenue Service will not pursue the sanction of plan disqualification on account of the qualification failuresdescribed in this VCP submission.

The Internal Revenue Service will treat the adoption of the amendments as making available the remedial amendment period,

currently described in Rev. Proc. 2005–66.

Approved:

Joyce Kahn, Manager

Employee Plans Voluntary Compliance

Tax Exempt and Government Entities Division


Date:

2006–22 I.R.B. 1000 May 30, 200



Definitionof Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the ef-

fect:

Amplified describes a situation where

no change is being made in a prior pub-lished position, but the prior position is be-

ing extended to apply to a variation of the

fact situation set forth therein. Thus, if

an earlier ruling held that a principle ap-

plied toA, and the new ruling holds thatthe

same principle also applies to B, the earlier

ruling is amplified. (Compare with modi-

fied , below).

Clarified is used in those instances

where the language in a prior ruling is be-

ing made clear because the language has

caused, or may cause, some confusion.

It is not used where a position in a prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously pub-

lished ruling and points out an essential

difference between them.

Modified is used where the substance

of a previously published position is being

changed. Thus, if a prior ruling held that a

principle applied to A but not to B, and the

new ruling holds that it applies to both A

and B, the prior ruling is modified because

it corrects a published position. (Compare

with amplified and clarified , above).

Obsoleted describes a previously pub-

lished ruling that is not considered deter-

minative with respect to future transac-

tions. This term is most commonly used ina ruling that lists previously published rul-

ings that are obsoleted because of changes

in laws or regulations. A ruling may also

be obsoleted because the substance has

been included in regulations subsequently

adopted.

Revoked describes situations where the

position in the previously published ruling

is not correct and the correct position is

being stated in a new ruling.

Superseded describes a situation where

the new ruling does nothing more than re-

state the substance and situation of a previ-ously published ruling (or rulings). Thus,

the term is used to republish under the

1986 Code and regulations the same po-

sition published under the 1939 Code and

regulations. The term is also used when

it is desired to republish in a single rul-

ing a series of situations, names, etc., that

were previously published over a period of

time in separate rulings. If the new rul-

ing does more than restate the substance

of a prior ruling, a combination of terms

is used. For example, modified and su-

perseded describes a situation where the

substance of a previously published ruling

is being changed in part and is continued

without change in part and it is desired to

restate the valid portion of the previouslypublished ruling in a new ruling that is self

contained. In this case, the previously pub-

lished ruling is first modified and then, as

modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and that

list is expanded by adding further names in

subsequent rulings. After the original rul-

ing has been supplemented several times, a

new ruling may be published that includes

the list in the original ruling and the ad-

ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations

to show that the previous published rul-

ings will not be applied pending some

future action such as the issuance of new

or amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

AbbreviationsThe following abbreviations in current use

and for merly used will appear in material

published in the Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE —Beneficiary.

BK —Bank .

B.T.A.—Board of Tax Appeals.

C —Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.CI —City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY —County.

D—Decedent.

DC —Dummy Corporation.

DE —Donee.

Del. Order —Delegation Order.

DISC —Domestic International Sales Corporation.

DR—Donor.

E —Estate.

EE —Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX —Executor.

F —Fiduciary.

FC —Foreign Country.

FICA—Federal Insurance Contributions Act.

FISC —Foreign International Sales Company.

FPH —Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX —Foreign corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE —Grantee.

GP—General Partner.

GR—Grantor.

IC —Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE —Lessee.

LP—Limited Partner.

LR—Lessor.

M —Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC —Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE —Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT —Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statement of Procedural Rules.

Stat.—Statutes at Large.

T —Target Corporation.

T.C.—Tax Court.

T.D. —Treasury Decision.

TFE —Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT —Trustee.

U.S.C.—United States Code.

X —Corporation.

Y —Corporation.

Z —Corporation.

May 30, 2006 i 2006–22 I.R.B.



Numerical Finding List1

Bulletin 2006–1 through 2006–22

Announcements:

2006-1, 2006-1 I.R.B. 260

2006-2, 2006-2 I.R.B. 300

2006-3, 2006-3 I.R.B. 327

2006-4, 2006-3 I.R.B. 328

2006-5, 2006-4 I.R.B. 3782006-6, 2006-4 I.R.B. 340

2006-7, 2006-4 I.R.B. 342

2006-8, 2006-4 I.R.B. 344

2006-9, 2006-5 I.R.B. 392

2006-10, 2006-5 I.R.B. 393

2006-11, 2006-6 I.R.B. 420

2006-12, 2006-6 I.R.B. 421

2006-13, 2006-7 I.R.B. 462

2006-14, 2006-8 I.R.B. 516

2006-15, 2006-11 I.R.B. 632

2006-16, 2006-12 I.R.B. 653

2006-17, 2006-12 I.R.B. 653

2006-18, 2006-12 I.R.B. 654

2006-19, 2006-13 I.R.B. 674

2006-20, 2006-13 I.R.B. 675

2006-21, 2006-14 I.R.B. 703

2006-22, 2006-16 I.R.B. 779

2006-23, 2006-14 I.R.B. 729

2006-24, 2006-16 I.R.B. 820

2006-25, 2006-18 I.R.B. 871

2006-26, 2006-18 I.R.B. 871

2006-27, 2006-18 I.R.B. 871

2006-28, 2006-18 I.R.B. 873

2006-29, 2006-19 I.R.B. 879

2006-30, 2006-19 I.R.B. 879

2006-31, 2006-20 I.R.B. 912

2006-32, 2006-20 I.R.B. 913

2006-33, 2006-20 I.R.B. 914

2006-34, 2006-21 I.R.B. 937

Court Decisions:

2081, 2006-13 I.R.B. 656

2082, 2006-14 I.R.B. 697

Notices:

2006-1, 2006-4 I.R.B. 347

2006-2, 2006-2 I.R.B. 278

2006-3, 2006-3 I.R.B. 306 2006-4, 2006-3 I.R.B. 307

2006-5, 2006-4 I.R.B. 348

2006-6, 2006-5 I.R.B. 385

2006-7, 2006-10 I.R.B. 559

2006-8, 2006-5 I.R.B. 386

2006-9, 2006-6 I.R.B. 413

2006-10, 2006-5 I.R.B. 386

2006-11, 2006-7 I.R.B. 457

Notices— Continued:

2006-12, 2006-7 I.R.B. 458

2006-13, 2006-8 I.R.B. 496

2006-14, 2006-8 I.R.B. 498

2006-15, 2006-8 I.R.B. 501

2006-16, 2006-9 I.R.B. 538

2006-17, 2006-10 I.R.B. 559

2006-18, 2006-8 I.R.B. 502

2006-19, 2006-9 I.R.B. 539

2006-20, 2006-10 I.R.B. 560

2006-21, 2006-12 I.R.B. 643

2006-22, 2006-11 I.R.B. 593

2006-23, 2006-11 I.R.B. 594

2006-24, 2006-11 I.R.B. 595

2006-25, 2006-11 I.R.B. 609

2006-26, 2006-11 I.R.B. 622

2006-27, 2006-11 I.R.B. 626

2006-28, 2006-11 I.R.B. 628

2006-29, 2006-12 I.R.B. 644

2006-31, 2006-15 I.R.B. 751

2006-32, 2006-13 I.R.B. 677

2006-33, 2006-15 I.R.B. 7542006-34, 2006-14 I.R.B. 705

2006-35, 2006-14 I.R.B. 708

2006-36, 2006-15 I.R.B. 756

2006-37, 2006-18 I.R.B. 855

2006-38, 2006-16 I.R.B. 777

2006-39, 2006-17 I.R.B. 841

2006-40, 2006-18 I.R.B. 855

2006-41, 2006-18 I.R.B. 857

2006-42, 2006-19 I.R.B. 878

2006-43, 2006-21 I.R.B. 921

2006-44, 2006-20 I.R.B. 889

2006-45, 2006-20 I.R.B. 891

2006-47, 2006-20 I.R.B. 892

2006-48, 2006-21 I.R.B. 922

2006-49, 2006-22 I.R.B. 943

Proposed Regulations:

REG-107722-00, 2006-4 I.R.B. 354

REG-104385-01, 2006-5 I.R.B. 389

REG-122380-02, 2006-10 I.R.B. 563

REG-137243-02, 2006-3 I.R.B. 317

REG-133446-03, 2006-2 I.R.B. 299

REG-113365-04, 2006-10 I.R.B. 580

REG-148568-04, 2006-6 I.R.B. 417

REG-106418-05, 2006-7 I.R.B. 461

REG-133036-05, 2006-20 I.R.B. 911

REG-138879-05, 2006-8 I.R.B. 503

REG-143244-05, 2006-6 I.R.B. 419

REG-146384-05, 2006-17 I.R.B. 843

REG-146459-05, 2006-8 I.R.B. 504

REG-157271-05, 2006-12 I.R.B. 652

REG-164247-05, 2006-15 I.R.B. 758

Revenue Procedures:

2006-1, 2006-1 I.R.B. 1

2006-2, 2006-1 I.R.B. 89

2006-3, 2006-1 I.R.B. 122

2006-4, 2006-1 I.R.B. 132

2006-5, 2006-1 I.R.B. 174

2006-6, 2006-1 I.R.B. 204

2006-7, 2006-1 I.R.B. 242

2006-8, 2006-1 I.R.B. 245

2006-9, 2006-2 I.R.B. 278

2006-10, 2006-2 I.R.B. 293

2006-11, 2006-3 I.R.B. 309

2006-12, 2006-3 I.R.B. 310

2006-13, 2006-3 I.R.B. 315

2006-14, 2006-4 I.R.B. 350

2006-15, 2006-5 I.R.B. 387

2006-16, 2006-9 I.R.B. 539

2006-17, 2006-14 I.R.B. 709

2006-18, 2006-12 I.R.B. 645

2006-19, 2006-13 I.R.B. 677

2006-20, 2006-17 I.R.B. 841

2006-23, 2006-20 I.R.B. 900

2006-24, 2006-22 I.R.B. 943

2006-25, 2006-21 I.R.B. 926

2006-26, 2006-21 I.R.B. 936

2006-27, 2006-22 I.R.B. 945

Revenue Rulings:

2006-1, 2006-2 I.R.B. 261

2006-2, 2006-2 I.R.B. 261

2006-3, 2006-2 I.R.B. 276

2006-4, 2006-2 I.R.B. 264

2006-5, 2006-3 I.R.B. 302

2006-6, 2006-5 I.R.B. 3812006-7, 2006-6 I.R.B. 399

2006-8, 2006-9 I.R.B. 520

2006-9, 2006-9 I.R.B. 519

2006-10, 2006-10 I.R.B. 557

2006-11, 2006-12 I.R.B. 635

2006-12, 2006-12 I.R.B. 637

2006-13, 2006-13 I.R.B. 656

2006-14, 2006-15 I.R.B. 740

2006-15, 2006-13 I.R.B. 661

2006-16, 2006-14 I.R.B. 694

2006-17, 2006-15 I.R.B. 748

2006-18, 2006-15 I.R.B. 743

2006-19, 2006-15 I.R.B. 7492006-20, 2006-15 I.R.B. 746

2006-21, 2006-15 I.R.B. 745

2006-22, 2006-14 I.R.B. 687

2006-23, 2006-17 I.R.B. 839

2006-24, 2006-19 I.R.B. 875

2006-25, 2006-20 I.R.B. 882

2006-26, 2006-22 I.R.B. 939

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulle

2005–52, dated December 27, 2005.

2006–22 I.R.B. ii May 30, 200



Revenue Rulings— Continued:

2006-27, 2006-21 I.R.B. 915

2006-28, 2006-22 I.R.B. 938

Tax Conventions:

2006-6, 2006-4 I.R.B. 340

2006-7, 2006-4 I.R.B. 342

2006-8, 2006-4 I.R.B. 344

2006-19, 2006-13 I.R.B. 674

2006-20, 2006-13 I.R.B. 675

2006-21, 2006-14 I.R.B. 703

Treasury Decisions:

9231, 2006-2 I.R.B. 272

9232, 2006-2 I.R.B. 266

9233, 2006-3 I.R.B. 303

9234, 2006-4 I.R.B. 329

9235, 2006-4 I.R.B. 338

9236, 2006-5 I.R.B. 382

9237, 2006-6 I.R.B. 394

9238, 2006-6 I.R.B. 408

9239, 2006-6 I.R.B. 4019240, 2006-7 I.R.B. 454

9241, 2006-7 I.R.B. 427

9242, 2006-7 I.R.B. 422

9243, 2006-8 I.R.B. 475

9244, 2006-8 I.R.B. 463

9245, 2006-14 I.R.B. 696

9246, 2006-9 I.R.B. 534

9247, 2006-9 I.R.B. 521

9248, 2006-9 I.R.B. 524

9249, 2006-10 I.R.B. 546

9250, 2006-11 I.R.B. 588

9251, 2006-11 I.R.B. 590

9252, 2006-12 I.R.B. 633

9253, 2006-14 I.R.B. 689

9254, 2006-13 I.R.B. 662

9255, 2006-15 I.R.B. 741

9256, 2006-16 I.R.B. 770

9257, 2006-17 I.R.B. 821

9258, 2006-20 I.R.B. 886

9259, 2006-19 I.R.B. 874

9261, 2006-21 I.R.B. 919

May 30, 2006 iii 2006–22 I.R.B.



Finding List of Current Actions on

Previously Published Items1

Bulletin 2006–1 through 2006–22

Announcements:

2000-48

Modified by

Notice 2006-35, 2006-14 I.R.B. 708

Notices:

2001-4

Sections (V)(C), (D), and (E) superseded by

T.D. 9253, 2006-14 I.R.B. 689

2001-11

Superseded by

T.D. 9253, 2006-14 I.R.B. 689

2001-43

Modified by

Notice 2006-35, 2006-14 I.R.B. 708

Sections 2 and 3 superseded by

T.D. 9253, 2006-14 I.R.B. 689

2002-35

Clarified and modified by

Notice 2006-16, 2006-9 I.R.B. 538

2005-30

Modified and superseded by

Notice 2006-31, 2006-15 I.R.B. 751

2005-44

Supplemented by

Notice 2006-1, 2006-4 I.R.B. 347

2005-66

Supplemented by

Notice 2006-20, 2006-10 I.R.B. 560

2005-73

Supplemented by

Notice 2006-20, 2006-10 I.R.B. 560

2005-81

Supplemented by

Notice 2006-20, 2006-10 I.R.B. 560

2005-98

Supplemented by

Notice 2006-7, 2006-10 I.R.B. 559

Proposed Regulations:

REG-103829-99

Withdrawn by

Ann. 2006-16, 2006-12 I.R.B. 653

REG-150313-01

Withdrawn by

Ann. 2006-30, 2006-19 I.R.B. 879

Proposed Regulations— Continued:

REG-131739-03

Corrected by

Ann. 2006-10, 2006-5 I.R.B. 393

REG-131264-04

Withdrawn by

Ann. 2006-34, 2006-21 I.R.B. 937

REG-138647-04

Corrected by

Ann. 2006-4, 2006-3 I.R.B. 328

REG-158080-04

Corrected by

Ann. 2006-11, 2006-6 I.R.B. 420

Revenue Procedures:

81-17

Obsoleted by

Rev. Proc. 2006-24, 2006-22 I.R.B. 943

89-8

Superseded by

Rev. Proc. 2006-23, 2006-20 I.R.B. 900

96-52

Superseded by

Rev. Proc. 2006-10, 2006-2 I.R.B. 293

97-27

Modified by

Rev. Proc. 2006-11, 2006-3 I.R.B. 309

Modified and amplified by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

2002-9

Modified by

Rev. Proc. 2006-11, 2006-3 I.R.B. 309

Modified and amplified by

Notice 2006-47, 2006-20 I.R.B. 892

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

Rev. Proc. 2006-14, 2006-4 I.R.B. 350

Rev. Proc. 2006-16, 2006-9 I.R.B. 539

2002-17

Modified by

Rev. Proc. 2006-14, 2006-4 I.R.B. 350

2002-52

Modified by

Rev. Proc. 2006-26, 2006-21 I.R.B. 936

2003-31

Superseded by

Rev. Proc. 2006-19, 2006-13 I.R.B. 677

2003-38

Modified by

Rev. Proc. 2006-16, 2006-9 I.R.B. 539

2003-44


Rev. Proc. 2006-27, 2006-22 I.R.B. 945

Revenue Procedures— Continued:

2004-23

Superseded for certain taxable years by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

2004-40

Superseded by

Rev. Proc. 2006-9, 2006-2 I.R.B. 278

2005-1

Superseded by

Rev. Proc. 2006-1, 2006-1 I.R.B. 1

2005-2

Superseded by

Rev. Proc. 2006-2, 2006-1 I.R.B. 89

2005-3

Superseded by

Rev. Proc. 2006-3, 2006-1 I.R.B. 122

2005-4

Superseded by

Rev. Proc. 2006-4, 2006-1 I.R.B. 132

2005-5Superseded by

Rev. Proc. 2006-5, 2006-1 I.R.B. 174

2005-6

Superseded by

Rev. Proc. 2006-6, 2006-1 I.R.B. 204

2005-7

Superseded by

Rev. Proc. 2006-7, 2006-1 I.R.B. 242

2005-8

Superseded by

Rev. Proc. 2006-8, 2006-1 I.R.B. 245

2005-9

Superseded for certain taxable years by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

2005-12

Section 10 modified and superseded by

Rev. Proc. 2006-1, 2006-1 I.R.B. 1

2005-15

Obsoleted in part by

Rev. Proc. 2006-17, 2006-14 I.R.B. 709

2005-21

Superseded by

Rev. Proc. 2006-25, 2006-21 I.R.B. 926 2005-22

Obsoleted by

Rev. Proc. 2006-20, 2006-17 I.R.B. 841

2005-24

Modified by

Notice 2006-15, 2006-8 I.R.B. 501

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December

2005.

2006–22 I.R.B. iv May 30, 200



Revenue Procedures— Continued:

2005-61

Superseded by

Rev. Proc. 2006-3, 2006-1 I.R.B. 122

2005-68

Superseded by

Rev. Proc. 2006-1, 2006-1 I.R.B. 1

Rev. Proc. 2006-3, 2006-1 I.R.B. 122

Revenue Rulings:

55-355

Obsoleted by

T.D. 9244, 2006-8 I.R.B. 463

74-503

Revoked by

Rev. Rul. 2006-2, 2006-2 I.R.B. 261

77-230

Obsoleted by

T.D. 9249, 2006-10 I.R.B. 546

91-5

Modified byT.D. 9250, 2006-11 I.R.B. 588

92-19

Supplemented in part by

Rev. Rul. 2006-25, 2006-20 I.R.B. 882

92-86

Modified by

T.D. 9250, 2006-11 I.R.B. 588

2000-2


Rev. Rul. 2006-26, 2006-22 I.R.B. 939

Treasury Decisions:

9191

Corrected by

Ann. 2006-26, 2006-18 I.R.B. 871

9192

Corrected by

Ann. 2006-15, 2006-11 I.R.B. 632

9203

Corrected by

Ann. 2006-12, 2006-6 I.R.B. 421

9244

Corrected byAnn. 2006-31, 2006-20 I.R.B. 912

9248

Corrected by

Ann. 2006-32, 2006-20 I.R.B. 913

May 30, 2006 v 2006–22 I.R.B.



INDEX

Internal Revenue Bulletins 2006–1 through2006–22

The abbreviation and number in parenthesis following the index entryrefer to the specific item; numbers in roman and italic type followingthe parentheses refer to the Internal Revenue Bulletin in which the item

may be found and the page number on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural RulesTC Tax Convention

TD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANS

Determination letters, issuing procedures (RP 6) 1, 204

Disaster relief, expanded postponement of deadlines for certain

acts under section 7508A with respect to taxpayers affected by

Hurricane Katrina (Notice 20) 10, 560

Disclosure of relative values of optional forms of benefit (TD

9256) 16, 770

Employee Plans Compliance Resolution System (EPCRS), cor-

rection programs (RP 27) 22, 945

Full funding limitations, weighted average interest rate for:

January 2006 (Notice 8) 5, 386

February 2006 (Notice 19) 9, 539

March 2006 (Notice 32) 13, 677

April 2006 (Notice 39) 17, 841

May 2006 (Notice 49) 22, 943

Letter rulings:

And determination letters, areas which will not be issued

from:

Associates Chief Counsel and Division Counsel (TE/GE)

(RP 3) 1, 122

Associate Chief Counsel (International) (RP 7) 1, 242

And information letters, procedures (RP 4) 1, 132User fees, request for letter rulings (RP 8) 1, 245

Proposed regulations:

26 CFR 1.402(g)–1, amended; 1.402A–1, –2, added;

1.403(b)–2, –3, –5, –7, amended; 1.408A–10,

added; designated Roth accounts under section 402A

(REG–146459–05) 8, 504

Regulations:

26 CFR 1.401(a)–20, amended; 1.417(a)(3)–1, amended; dis-

closure of relative values of optional forms of benefit (TD

9256) 16, 770

EMPLOYEE PLANS—Cont.

26 CFR 1.401(k)–0, –2, –6, amended; 1.401(k)–1(f), revise

1.401(m)–0, –2, –5, amended; 602.101, amended; desi

nated Roth contributions to cash or deferred arrangemen

under section 401(k) (TD 9237) 6, 394

Retirement plans, sample amendment for Roth section 401(

plan (Notice 44) 20, 889

Roth IRAs:Designated Roth contributions to cash or deferred arrang

ments under section 401(k) (TD 9237) 6, 394

Distributions of designated Roth contributio

(REG–146459–05) 8, 504

Reporting requirements, fair market value, Roth IRA conv

sion (RP 13) 3, 315

Technical advice to IRS employees (RP 5) 1, 174

EMPLOYMENT TAX

Bankruptcy estate, unpaid tax liability, procedure for trustees

obtain determination by the Service (RP 24) 22, 943Disaster relief:

Backup withholding, postponement of deadlines for certa

acts due to Hurricanes Katrina and Rita (Notice 12) 7, 45

Expanded postponement of deadlines for certain acts und

section 7508A with respect to taxpayers affected by Hur

cane Katrina (Notice 20) 10, 560

Hurricane Katrina, treatment of special evacuation

lowances (Notice 10) 5, 386

Letter rulings and information letters issued by Associate O

fices, determination letters issued by Operating Divisions (R

1) 1, 1

Proposed regulations:

26 CFR 31.6011(a)–1, –4, amended; 31.6302–1, amendetime for filing employment tax returns and modificatio

to the deposit rules (REG–148568–04) 6, 417

Publications:

1223, General Rules and Specifications for Substitute Form

W-2c and W-3c, revised (RP 19) 13, 677

4436, General Rules and Specifications for Substitute For

941 and Schedule B (Form 941), revised (RP 25) 21, 92

Regulations:

26 CFR 1.6302–1, –2, amended; 31.6011(a)–1, –4, amende

31.6011(a)–1T, –4T, added; 31.6071(a)–1, amende

31.6302–0, –1, amended; 31.6302–1T, added; time f

filing employment tax returns and modifications to t

deposit rules (TD 9239) 6, 40126 CFR 31.3121(a)(2)–1, amended; 32.1, amended; sickne

or accident disability payments (TD 9233) 3, 303

Substitute forms:

W-2c and W-3c, general rules and specifications (RP 19) 1

677

941 and Schedule B (Form 941), general rules and specific

tions (RP 25) 21, 926

Technical Advice Memoranda (TAMs) and Technical Expedit

Advice Memoranda (TEAMs) (RP 2) 1, 89

2006–22 I.R.B. vi May 30, 200



EMPLOYMENT TAX—Cont.

Time for filing employment tax returns and modifications to the

deposit rules (TD 9239) 6, 401; (REG–148568–04) 6, 417

Treatment of sickness or accident disability payments (TD 9233)

3, 303

ESTATE TAX




Individual retirement account (IRA), marital trust as IRA bene-

ficiary, qualifying income interest (RR 26) 22, 939

Letter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions (RP

1) 1, 1

Technical Advice Memoranda (TAMs) and Technical Expedited


EXCISE TAXBankruptcy estate, unpaid tax liability, procedure for trustees to

obtain determination by the Service (RP 24) 22, 943




Health Savings Accounts (HSAs), employer comparable contri-

butions, public hearing on REG–138647–04 (Ann 4) 3, 328

Highway vehicle, definition, withdrawal of REG–103829–99

(Ann 16) 12, 653



1) 1, 1



EXEMPT ORGANIZATIONS

Annual notice to donors regarding pending and settled declara-

tory judgment suits (Ann 1) 1, 260

Determination of gross receipts for purposes of section

501(c)(15), insurance companies (Notice 42) 19, 878



Hurricane Katrina (Notice 20) 10, 560Down payment assistance, home buyers (RR 27) 21, 915

Information reporting by organizations that receive charitable

contributions of certain motor vehicles, boats, and airplanes

(Notice 1) 4, 347

Letter rulings:

And determination letters, areas which will not be issued from


(RP 3) 1, 122

And information letters, procedures (RP 4) 1, 132

User fees, request for letter rulings (RP 8) 1, 245

EXEMPT ORGANIZATIONS—Cont.

List of organizations classified as private foundations (Ann 5) 4,

378; (Ann 14) 8, 516 ; (Ann 18) 12, 654; (Ann 27) 18, 871

Revocations (Ann 3) 3, 327 ; (Ann 9) 5, 392; (Ann 13) 7, 462;

(Ann 17) 12, 653; (Ann 24) 16, 820; (Ann 28) 18, 873; (Ann

33) 20, 914

Technical advice to IRS employees (RP 5) 1, 174

GIFT TAX

Charitable remainder trusts, waiver of spousal right of election

to ensure qualification of charitable remainder annuity trust

(CRAT) or charitable remainder unitrust (CRUT) (Notice 15)

8, 501






1) 1, 1Technical Advice Memoranda (TAMs) and Technical Expedited


INCOME TAX

Acceptance agent revenue procedure (RP 10) 2, 293

Accounting methods:

Automatic consent to change procedures (RP 12) 3, 310

Automatic consent to change, replacement cost method for

parts inventory of heavy equipment dealers (RP 14) 4, 350

Normalization public utilities (REG–104385–01) 5, 389

Simplified service cost and simplified production methods,

consent procedures (RP 11) 3, 309

Advance Pricing Agreement (APA) Program:

Administration (RP 9) 2, 278

Annual report to the public, 2005 (Ann 22) 16, 779

Agent for a consolidated group with foreign common parent (TD

9255) 15, 741; (REG–164247–05) 15, 758

Aircraft and vessel leasing income, modifications to subpart F

treatment (Notice 48) 21, 922

Allocation and apportionment of expenses, tax book value

method (TD 9247) 9, 521

Annual notice to donors regarding pending and settled declara-

tory judgment suits (Ann 1) 1, 260

Application of section 108 to members of a consolidated group,correction to TD 9192 (Ann 15) 11, 632

Automobile owners and lessees, inflation adjustment for 2006

(RP 18) 12, 645

Bankruptcy estate, unpaid tax liability, procedure for trustees to

obtain determination by the Service (RP 24) 22, 943

Bonds:

Clean renewable energy bonds (Notice 7) 10, 559

Exempt facility bonds, qualified highway or surface freight

transfer facilities (Notice 45) 20, 891

May 30, 2006 vii 2006–22 I.R.B.



INCOME TAX—Cont.

Gulf Opportunity Zone Bonds, Gulf Opportunity Zone Ad-

vance Refunding Bonds, and Gulf Tax Credit Bonds (No-

tice 41) 18, 857

Private activity bond, definition, tax-exempt bonds issued by

state and local governments (TD 9234) 4, 329

Book-tax filter of reportable transactions under regulations sec-

tion 1.6011–4, removal (Notice 6) 5, 385Commercial revitalization deduction for buildings located in the

expanded area of a renewal community (RP 16) 9, 539

Competent authority procedures with respect to the U.S. posses-

sions (RP 23) 20, 900

Consolidated returns:

Basis reallocation, loss suspension, and expiration of losses

on certain stock dispositions (TD 9254) 13, 662

Intercompany transactions (TD 9261) 21, 919; withdrawal of

REG–131264–04 (Ann 34) 21, 937

Corporations:

Clarification of section 1374 effective dates (TD 9236) 5, 382

Determination of surrogate foreign corporation status when

there is an expanded affiliated group (TD 9238) 6, 408;(REG–143244–05) 6, 419

Entity classification, classification of:

Foreign entities, per se corporations (TD 9235) 4, 338

Japanese Tokurei Yugen Kaisha (TYK) (RR 3) 2, 276

Estimated tax payments by corporations (REG–107722–00)

4, 354

Information reporting for distributions with respect to securi-

ties issued by foreign corporations (Notice 3) 3, 306

Passive foreign investment company (PFIC) purging elec-

tions:

Foreign corporation no longer satisfies definition of PFIC

under section 1297(a) (TD 9231) 2, 272

Foreign corporation no longer treated as PFIC under sec-

tion 1297(a) or (e) (TD 9232) 2, 266 ; (REG–133446–03)

2, 299

Section 951 pro rata share allocations, special rules (TD 9251)

11, 590

Statutory mergers or consolidations:

Definition (TD 9242) 7, 422; amendment (TD 9259) 19,

874

Under section 368(a)(1)(A), involving one or more foreign

corporations (TD 9243) 8, 475

Subpart F income (TD 9240) 7, 454; (REG–106418–05) 7,

461

Transfers to corporations, corporate formations, corporate re-organizations (RR 2) 2, 261

Credits:

Alternative motor vehicle credit, advanced lean burn and hy-

brid motor vehicles (Notice 9) 6, 413

Clean renewable energy bonds (Notice 7) 10, 559

Energy efficient home credit:

Certification for dwelling unit other than manufactured

home (Notice 27) 11, 626

Certification for manufactured home (Notice 28) 11, 628

INCOME TAX—Cont.

Low-income housing credit:

2006 population figures used for calculation (Notice 2

11, 593

Satisfactory bond, “bond factor” amounts for the period

January through March 2006 (RR 5) 3, 302

January through June 2006 (RR 14) 15, 740

Suspension of certain requirements under section 42 dto Hurricane Rita (Notice 11) 7, 457

Nonbusiness energy property credit, Eligible Building Env

lope Component or Qualified Energy Property (Notice 2

11, 622

Nonconventional source fuel credit, inflation adjustment fa

tor, reference price for CY 2005 (Notice 37) 18, 855

Nuclear energy tax credits (Notice 40) 18, 855

Qualifying advanced coal project credit (Notice 24) 11, 59

Qualifying gasification project credit (Notice 25) 11, 609

Rehabilitation tax credit, disaster relief (Notice 38) 16, 777

Renewable electricity credit, reduction under section 45(b)(

(RR 9) 9, 519

Deemed election to be an association taxable as a corporation fa qualified electing S corporation, correction to TD 9203 (A

12) 6, 421

Determination of bona fide residence in a U.S. possession (T

9248) 9, 524; correction (Ann 32) 20, 913

Disaster relief:

Additional first year depreciation deduction relief for certa

disaster areas (Ann 29) 19, 879

Backup withholding, postponement of deadlines for certa

acts due to Hurricanes Katrina and Rita (Notice 12) 7, 45

Expanded postponement of deadlines for certain acts und

section 7508A with respect to taxpayers affected by Hur

cane Katrina (Notice 20) 10, 560

Gulf Opportunity (GO) Zone resident population estimat

(Notice 21) 12, 643

Gulf Opportunity Zone Bonds, Gulf Opportunity Zone A

vance Refunding Bonds, and Gulf Tax Credit Bonds (N

tice 41) 18, 857

Hurricanes Katrina, Rita, and Wilma, postponement of dea

line to make certain section 165(i) elections (Notice 17) 1

559

Hurricane Katrina, treatment of special evacuation

lowances (Notice 10) 5, 386

Rehabilitation tax credit (Notice 38) 16, 777

Suspension of certain requirements under section 42 due

Hurricane Rita (Notice 11) 7, 457 Disciplinary actions involving attorneys, certified public accou

tants, enrolled agents, and enrolled actuaries (Ann 23) 14, 7

Disclosure and use of tax return information:

Disclosure of return information to Department of Agricultu

for use in census of agriculture (TD 9245) 14, 696

New and additional rules for electronic conse

(REG–137243–02) 3, 317

Down payment assistance, home buyers (RR 27) 21, 915

Elections created or affected by the American Jobs Creation A

of 2004, procedures for making or revoking (Notice 47) 2

892

2006–22 I.R.B. viii May 30, 200



INCOME TAX—Cont.

Employer-provided vehicles, maximum values for which the

special valuation rules of regulations sections 1.61–21(d) and

(e) may be used (RP 15) 5, 387

Entity classification, dually chartered entity, clarification of def-

initions (TD 9246) 9, 534

Forms:

8609 revision, 8609-A replaces Schedule A (Form 8609)(Ann 2) 2, 300

8898 (March 2006), Statement for Individuals Who Begin or

End Bona Fide Residence in a U.S. Possession, new (Ann

25) 18, 871

Frivolous tax returns, tax avoidance:

All individuals are subject to federal income tax (RR 18) 15,

743

Attempts to escape taxation by attributing income to pur-

ported trust (RR 19) 15, 749

Claim of tax exempt status based on an unspecified “Native

American Treaty” (RR 20) 15, 746

Common frivolous arguments and schemes (Notice 31) 15,

751

Insertion of phrase “nunc pro tunc” on tax return (RR 17) 15,

748

Paperwork Reduction Act does not relieve taxpayers of the

duty to file a federal income tax return (RR 21) 15, 745

Guidance Priority List, recommendations for 2006–2007 (Notice

36) 15, 756

Guidance regarding reporting for widely held fixed investment

trusts (WHFITs) (Notice 29) 12, 644

Individual Retirement Accounts (IRAs), bankruptcy, right to re-

ceive payments (CD 2081) 13, 656

Information reporting by organizations that receive charitable

contributions of certain motor vehicles, boats, and airplanes

(Notice 1) 4, 347

Insurance companies:

Deemed sale or acquisition of an insurance company’s assets

(TD 9257) 17, 821; (REG–146384–05) 17, 843

Life-nonlife tacking rule (TD 9258) 20, 886 ;

(REG–133036–05) 20, 911

Prevailing state assumed interest rates, 2006 (RR 25) 20, 882

Tentative recomputed differential earnings rate for 2004 (No-

tice 18) 8, 502

Interest:

Election to treat qualified dividend income as investment in-

come, correction to TD 9191 (Ann 26) 18, 871

Investment:Federal short-term, mid-term, and long-term rates for:

January 2006 (RR 4) 2, 264

February 2006 (RR 7) 6, 399

March 2006 (RR 10) 10, 557

April 2006 (RR 22) 14, 687

May 2006 (RR 24) 19, 875

Rates:

Underpayments and overpayments, quarter beginning:

April 1, 2006 (RR 12) 12, 637

Interim guidance with respect to the application of regulations

section 1.883–3 (Notice 43) 21, 921

INCOME TAX—Cont.

Inventory:

Heavy equipment dealers, replacement cost method of ac-

counting (RP 14) 4, 350

LIFO, price indexes used by department stores for:

November 2005 (RR 6) 5, 381

December 2005 (RR 8) 9, 520

January 2006 (RR 15) 13, 661February 2006 (RR 23) 17, 839

March 2006 (RR 28) 22, 938

Joint tax return, relief from joint and several liability (RR 16) 14,

694

Leases, tax-exempt use property (Notice 2) 2, 278

Letter rulings:

And determination letters, areas which will not be issued

from:


(RP 3) 1, 122

Associate Chief Counsel (International) (RP 7) 1, 242

And information letters issued by Associate Offices, determi-

nation letters issued by Operating Divisions (RP 1) 1, 1

Mortgage bonds and credit certificates, median income figures,

2006 (RP 20) 17, 841

National and area median gross income figures, guidance for

2006 (RP 20) 17, 841

Nonqualified deferred compensation plans:

Application of section 409A, correction to REG–158080–04

(Ann 11) 6, 420

With associated offshore trusts or financial health triggers,

transition guidance on the application of section 409A(b)

(Notice 33) 15, 754

Notional principal contracts, nonperiodic payment, listed trans-

actions, disclosure safe harbor (Notice 16) 9, 538

Partnerships:

Certain distributions treated as sales or exchanges (Notice 14)

8, 498

Classification of items under the TEFRA partnership provi-

sions (RR 11) 12, 635

Patriots’ Day 2006 in Maine, Maryland, Massachusetts, New

Hampshire, New York, Vermont, and the District of Colum-

bia, April 18 filing deadline (Notice 23) 11, 594

Practice before the Internal Revenue Service (REG–122380–02)

10, 563

Private foundations, organizations now classified as (Ann 5) 4,

378; (Ann 14) 8, 516 ; (Ann 18) 12, 654; (Ann 27) 18, 871

Proposed Regulations:26 CFR 1.46–6, amended; 1.168(i)–3, added; application of

normalization accounting rules to balances of excess de-

ferred income taxes and accumulated deferred investment

tax credits of public utilities whose assets cease to be pub-

lic utility property (REG–104385–01) 5, 389

26 CFR 1.56–0, –1, revised; 1.6425–2, revised; 1.6425–3,

amended; 1.6655–0, added; 1.6655–1 thru –3, revised;

1.6655–4 thru –6, added; 1.6655–7, removed; 1.6655–5 re-

designated as 1.6655–7 and revised; 301.6655–1, revised;

corporate estimated tax (REG–107722–00) 4, 354

May 30, 2006 ix 2006–22 I.R.B.



INCOME TAX—Cont.

26 CFR 1.197–2, amended; 1.338–1, –11, amended; 1.846–2,

–4, amended; application of section 338 to insurance com-

panies (REG–146384–05) 17, 843

26 CFR 1.468B–0, amended; 1.468B–6, added; 1.1031(k)–1,

amended; 1.7872–16, added; escrow accounts, trusts, and

other funds used during deferred exchanges of like-kind

property (REG–113365–04) 10, 58026 CFR 1.954–2, amended; guidance under subpart F relating

to partnerships (REG–106418–05) 7, 461

26 CFR 1.1291–9, revised; 1.1297–0, revised; 1.1297–3,

added; 1.1298–0, –3, revised; guidance on passive

foreign investment company (PFIC) purging elections

(REG–133446–03) 2, 299

26 CFR 1.1502–19, amended; treatment of excess loss ac-

counts (REG–138879–05) 8, 503

26 CFR 1.1502–47, –76, amended; amendment of tacking

rule requirements of life-nonlife consolidated regulations

(REG–133036–05) 20, 911

26 CFR 1.1502–77, amended; agent for a consolidated group

with foreign common parent (REG–164247–05) 15, 758

26 CFR 1.7874–1, added; guidance for determining owner-

ship by former shareholders or partners of domestic entities

(REG–143244–05) 6, 419

26 CFR 301.6103(p)(4)–1, (p)(7)–1, added; procedures for

administrative review of a determination that an authorized

recipient has failed to safeguard tax returns or return infor-

mation (REG–157271–05) 12, 652

26 CFR 301.7216–0, added; 301.7216–1, –2, –3, revised;

guidance necessary to facilitate electronic tax administra-

tion (REG–137243–02) 3, 317

31 CFR 10.1, 10.25, 10.27, 10.29, 10.34, 10.51, 10.52, 10.61,

10.65, 10.68, 10.76, 10.77, 10.78, 10.90, 10.91, revised;

10.2, 10.5, 10.6, 10.7, 10.22, 10.50, 10.60, 10.62, 10.70,

10.72, 10.73, 10.82, amended; 10.73, removed; 10.72 re-

designated as 10.73; 10.71 redesignated as 10.72, 10.71,

added; regulations governing practice before the Internal

Revenue Service (REG–122380–02) 10, 563

Publications:

1223, General Rules and Specifications for Substitute Forms

W-2c and W-3c, revised (RP 19) 13, 677

4436, General Rules and Specifications for Substitute Form

941 and Schedule B (Form 941), revised (RP 25) 21, 926

Qualified Intermediary (QI) branch rule, revocation (Notice 35)

14, 708

Qualified mortgage bonds (QMBs) and mortgage credit certifi-cates (MCCs), average area housing purchase prices for 2006

(RP 17) 14, 709

Qualified settlement funds and certain other escrow accounts,

trusts, and funds, taxation and reporting of earned income (TD

9249) 10, 546 ; (REG–113365–04) 10, 580

Redemptions taxable as dividend distributions, withdrawal of

REG–150313–01 (Ann 30) 19, 879

Regulated investment company (RIC), commodity swaps (RR 1)

2, 261

INCOME TAX—Cont.

Regulations:

26 CFR 1.141–0, –1, –15, amended; 1.141–13, adde

1.145–0, –2, amended; 1.149(d)–1, amended; 1.150–

amended; obligations of states and political subdivisio

(TD 9234) 4, 329

26 CFR 1.163(d)–1T, removed; time and manner of maki

section 163(d)(4)(B) election to treat qualified dividend icome as investment income, correction to TD 9191 (A

26) 18, 871

26 CFR 1.197–0, –2, amended; 1.197–2T, added; 1.338–

–1, amended; 1.338–1T, –11, –11T, added; 1.338(i)–

amended; 1.381(c)(22)–1, amended; 1.846–0, –

amended; 1.846–2T, –4T, added; 1.846–4, revise

1.1060–1, amended; 602.101, amended; application

section 338 to insurance companies (TD 9257) 17, 821

26 CFR 1.356–1, revised; 1.358–1, revised; 1.358–

amended; 1.1502–19, amended; 1.1502–19T, revise

1.1502–32, amended; determination of basis of stock

securities received in exchange for, or with respect to, sto

or securities in certain transactions, treatment of exceloss accounts (TD 9244) 8, 463; correction (Ann 31) 2

912

26 CFR 1.358–6, amended; 1.367(a)–3, (a)–8, (b)–1, (b)–

(b)–4, (b)–6, amended; 1.367(b)–13, added; 1.884–2, –2

amended; 1.6038B–1, –1T, amended; statutory mergers

consolidations under section 368(a)(1)(A) involving one

more foreign corporations, and guidance necessary to f

cilitate business electronic filing under section 6038B (T

9243) 8, 475

26 CFR 1.367(a)–3, (b)–4, (b)–6, amended; application

section 367 in cross border section 304 transactions, certa

transfers of stock involving foreign corporations (TD 925

11, 588

26 CFR 1.368–2, amended; 1.368–2T, removed; statuto

mergers and consolidations (TD 9242) 7, 422; 1.368–

amended; amendment (TD 9259) 19, 874

26 CFR 1.468B–0, –1, –5, amended; 1.468B–6 thru –

added; 602.101, amended; escrow funds and other simi

funds (TD 9249) 10, 546

26 CFR 1.671–4, amended; 1.671–5, added; 1.6041–

added; 1.6042–5, added; 1.6045–1, amended; 1.6049–

–5, amended; 1.6050N–2, added; 301.6109–1, amende

reporting for widely held fixed investment trusts (TD 924

7, 427

26 CFR 1.861–9, –9T, amended; allocation and apportioment of expenses, alternative method for determining t

book value of assets (TD 9247) 9, 521

26 CFR 1.881–5, added; 1.881–5T, revised; 1.931–1

amended; 1.932–1T, amended; 1.933–1T, amende

1.935–1T, amended; 1.937–1, added; 1.937–1T, remove

602.101, amended; residence rules involving U.S. posse

sions (TD 9248) 9, 524; correction (Ann 32) 20, 913

26 CFR 1.951–1, amended; special rules regarding certa

section 951 pro rata share allocations (TD 9251) 11, 590

2006–22 I.R.B. x May 30, 200



INCOME TAX—Cont.

26 CFR 1.954–2, amended; 1.954–2T, added; guidance under

subpart F relating to partnerships (TD 9240) 7, 454

26 CFR 1.1291–9, amended; 1.1297–0, revised; 1.1297–3,

added; 1.1298–0, –3, added; 602.101, amended; guidance

on passive foreign investment company (PFIC) purging

elections (TD 9231) 2, 272

26 CFR 1.1291–9T, added; 1.1297–0T, added; 1.1297–3T,revised; 1.1298–0T, –3T, added; 602.101, amended; guid-

ance on passive foreign investment company (PFIC) purg-

ing elections (TD 9232) 2, 266

26 CFR 1.1374–0, –8, –10, amended; 1.1374–8T, –10T, re-

moved; section 1374 effective dates (TD 9236) 5, 382

26 CFR 1.1441–1, –3, amended; 1.1441–6, revised;

1.6049–5, amended; 301.6114–1, amended; revisions

to regulations relating to withholding of tax on certain U.S.

source income paid to foreign persons and revisions of

information reporting regulations (TD 9253) 14, 689

26 CFR 1.1502–11, amended; application of section 108 to

members of a consolidated group, correction to TD 9192

(Ann 15) 11, 632

26 CFR 1.1502–13(c)(7)(ii), Example 13, removed and re-

served; intercompany transactions, manufacturer incentive

payments (TD 9261) 21, 919

26 CFR 1.1502–21, –21T, –32, amended; 1.1502–32T, –35T,

removed; 1.1502–35, added; 602.101, amended; suspen-

sion of losses on certain stock dispositions (TD 9254) 13,

662

26 CFR 1.1502–47, –76, amended; 1.1502–47T, –76T, added;

amendment of tacking rule requirements of life-nonlife con-

solidated regulations (TD 9258) 20, 886

26 CFR 1.1502–77, amended; 1.1502–77T, added; agent for a

consolidated group with foreign common parent (TD 9255)

15, 741

26 CFR 1.7874–1T, added; guidance for determining owner-

ship by former shareholders or partners of domestic entities

(TD 9238) 6, 408

26 CFR 301.6103(j)(5)–1, added; 301.6103(j)(5)–1T, re-

moved; disclosure of return information to the Department

of Agriculture (TD 9245) 14, 696

26 CFR 301.6103(p)(4)–1T, (p)(7)–1T, added; 6103(p)(7)–1,

removed; procedures for administrative review of a deter-

mination that an authorized recipient has failed to safeguard

tax returns or return information (TD 9252) 12, 633

26 CFR 301.7701–1, –2, –5, revised; 301.7701–1T, –2T, –5T,

removed; clarification of definitions (TD 9246) 9, 53426 CFR 301.7701–2, –2T, amended; classification of defini-

tions (TD 9235) 4, 338

26 CFR 301.7701–3T, added; deemed election to be an asso-

ciation taxable as a corporation for a qualified electing S

corporation, correction to TD 9203 (Ann 12) 6, 421

Reporting requirements for widely held fixed investment trusts

(TD 9241) 7, 427

Revocations, exempt organizations (Ann 3) 3, 327 ; (Ann 9) 5,

392; (Ann 13) 7, 462; (Ann 17) 12, 653; (Ann 24) 16, 820;

(Ann 28) 18, 873; (Ann 33) 20, 914

INCOME TAX—Cont.

Section 1503(d) filings, adoption of reasonable cause standard

(Notice 13) 8, 496

Standard Industry Fare Level (SIFL) formula (RR 13) 13, 656

Stocks:

Cross border section 304 transactions, application of section

367 (TD 9250) 11, 588

Determination of basis of stock and securities received in cer-tain transactions (TD 9244) 8, 463; correction (Ann 31) 20,

912

Outstanding stock rights, application of section 409A (Notice

4) 3, 307

Treatment of excess loss accounts (TD 9244) 8, 463;

(REG–138879–05) 8, 503

Substitute for return, Internal Revenue officer or employee, hear-

ing on REG–131739–03 (Ann 10) 5, 393

Substitute forms:

W-2c and W-3c, general rules and specifications (RP 19) 13,

677

941 and Schedule B (Form 941), general rules and specifica-

tions (RP 25) 21, 926

Tax conventions:

Competent authority procedures with respect to the U.S. pos-

sessions (RP 23) 20, 900

Superseding U.S.-Mexico LLC mutual agreement procedure

(MAP) (Ann 8) 4, 344

U.S.-Canada Appeals memorandum of understanding (MOU)

(Ann 7) 4, 342

U.S.-Ireland Common Contractual Funds MAP (Ann 19) 13,

674

U.S.-Japan Investment Bank MOU (Ann 6) 4, 340; self-certi-

fication of resident investment banks (Ann 20) 13, 675

U.S.-Spain limited liability company (LLC) MAP (Ann 21)

14, 703

Tax delinquency, sale of seized property (CD 2082) 14, 697

Tax returns and return information, administrative review if re-

cipient failed to safeguard information (TD 9252) 12, 633;

(REG–157271–05) 12, 652

Taxation of cross licenses (Notice 34) 14, 705



User fees for competent authority limitation on benefits determi-

nation (RP 26) 21, 936

Waiver of penalties for failure to report loan origination fees and

capitalized interest (Notice 5) 4, 348

Withholding tax, U.S. source income paid to foreign persons (TD9253) 14, 689

SELF-EMPLOYMENT TAX






1) 1, 1

May 30, 2006 xi 2006–22 I.R.B.



SELF-EMPLOYMENT TAX—Cont.



US Internal Revenue Service: irb06-22

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